Islamic Capital: Chapter 1 Overview

Chapter 1: Introduction to Islamic Capital

• This chapter introduces Islamic capital, covering financial market development, the Islamic capital market, and the differences between Islamic and conventional capital markets.

1.1 The Financial Market Development

• The 1880s saw the emergence of informal share dealing alongside commodity trading.
• Trading occurred in colonial clubs and coffee shops primarily for plantation and mining company shares.
• Notable British companies like Guthrie & Co Ltd, Fraser & Co Ltd, and Inch Kenneth Rubber Ltd were involved early on.
• 1929 saw the Wall Street Crash and the onset of the Great Depression, impacting financial markets.
• 1951 marked the establishment of the Employees Provident Fund, a significant step in mobilizing private investment funds.
• Through the 1950s to the 1990s, events included the creation of the Malayan Stock Exchange, later becoming the Bursa Malaysia, the establishment of Islamic banks, and the setting up of the Securities Commission among other significant changes and developments.
• Other key events include the launch of a Syariah Index, the introduction of a first global sukuk, the launch of the Capital Market Masterplan, first Islamic Real Estate Investment Trusts (REITs).

1.2 Introduction to Islamic Capital Market

• The Islamic capital market (ICM) is a market where investment and financing activities adhere to Shariah principles.
• Products and activities within the ICM are structured according to Shariah principles.
• Bursa Malaysia defines ICM as markets where activities occur without conflicting with Islamic principles.
• A key element of ICM is that interest-based transactions are prohibited, and the system emphasizes profit and loss sharing.

1.3 Differences between Islamic and Conventional Capital Market

• Shariah Framework: Islamic capital market products are designed based on Shariah law, ensuring adherence to Islamic laws. Scholars provide guidance. Conventional markets are not based on religious laws or guidelines.
• Prohibited Transactions: Islamic markets restrict stocks of companies involved in activities like gambling, alcohol, pornography, and arms dealings. Conventional markets do not have these restrictions (except for illegal activities like money laundering).
• Financing: Islamic banks primarily operate on an equity basis, sharing profits in a pre-agreed ratio. Conventional financing often relies on interest.
• Prohibition of Interest: Islamic capital markets prohibit the charge of interest (riba), a key difference from conventional markets.
• Sukuk Bond Market: Sukuks are Islamic bonds backed by assets or projects, unlike conventional bonds which operate on interest.

Q&A (General)

• Fundamentals of Islamic finance include no interest-based lending, profit and loss sharing, and the concept of one buyer-one seller.
• The Islamic capital market facilitates the trading of securities including long-term investments and risk management aligned with Islamic principles.
• Examples of products in the Islamic capital market include Islamic unit trusts, Islamic real estate investment trusts, and Shariah-compliant securities.
• The Islamic equity market exclusively involves trading Shariah-compliant stocks and securities, following Islamic principles.

This quiz explores Chapter 1 of Islamic Capital, focusing on the development of financial markets and the distinctions between Islamic and conventional capital markets. Learn about key events, companies, and milestones that shaped the emergence of Islamic finance from the 1880s to the 1990s.