Islamic Finance Principles and Regulations

Malaysian Capital Market

• The Malaysian Capital Market (ICM) has experienced rapid growth because of continuous government support.
• Government support is provided through Securities Commissions, Bank Negara Malaysia, and Bursa Malaysia.
• These institutions play a key role in promoting the ICM and provide infrastructure to facilitate financial players.

Regulators

• The Central Bank of Malaysia Act (CBA 2009) empowers the central bank to license and regulate institutions like banks, investments, and money brokers.
• Bank Negara Malaysia (BNM) has pushed forward legislation to promote Islamic banking and finance in Malaysia.
• Examples of legislation include the Islamic Financial Service Act 2013 (IFSA 2013), Offshore Companies Act 1990, and Labuan Offshore Securities Industry Act 1998.

Regulatory Authorities

• The Securities Commission of Malaysia (SC) is the main regulator for securities laws.
• Bursa Malaysia Securities Berhad (Bursa Securities) is the approved stock exchange, regulating listed companies and other stakeholders.

Bursa Malaysia

• Bursa Malaysia is an exchange holding company, approved under the Capital Market and Services Act 2007.
• Main activities include treasury management and provision of management/administrative services to subsidiaries.
• Bursa Malaysia operates a fully integrated exchange offering services like trading, clearing, settlement and depository services.
• Bursa Malaysia provides companies with access to capital and investors with opportunities to own shares and receive potential financial performance gains.

Roles and Responsibilities of Bursa Malaysia

• Bursa Malaysia strives to be a platform for trading Islamic securities and plays a significant role by offering competitive and innovative products with a sophisticated market structure.
• Bursa Malaysia is exploring the potential growth of the ICM. An example is developing infrastructure enabling CPO usage in Islamic banking transactions.
• Producing more Islamic funds that are Shariah compliant to meet demand from investors who seek to invest in Shariah compliant stock. The Shariah Index is a weighted average index.
• Performing regulatory and risk management duties set up by voluntary guidelines to ensure broking services accord with Shariah requirements.
• Introducing a strong risk management process to manage/settle risk.
• Developing and operating infrastructure for the Malaysia Capital Market. An example is the creation of a Financial Market Trading Platform (FTMP) with functions that include order matching, trade negotiation, trades reporting, and market surveillance.

Securities Commissions (SC)

• The SC was officially set up on March 1, 1993, under the Securities Commissions Act 1993.
• It is a self-funding, statutory body with investigative and enforcement powers, reporting to the Ministry of Finance.
• Annual accounts are tabled in Parliament.

Roles of Securities Commissions (SC)

• Regulatory Roles: The SC issues rules and regulations related to security issuance, Islamic securities offering, and penalties.

• Development Roles: The Securities Industry Development Centre (SIDC) is part of SC, promoting research and training in the securities and futures markets.

• Planner Role: The SC initiates measures to orchestrate multi-party collaboration to actualize the Capital Market Master Plan.

• Building Foundation of ICM: The SC initiative for building the foundation of the ICM has been an integral part of its capital market development agenda.

• Enhancing Corporate Governance: The SC prioritizes corporate governance to enable the Malaysian capital market to become transparent, accountable, and well-performing.

Shariah Advisory Council (SAC) of Securities Commission (SC)

• The SAC was established on May 16, 1996, to ensure the Malaysian capital market (ICM) complies with Shariah Principles.
• It conducts twice-yearly reviews of Shariah-compliant securities and issues updated lists of these in May and November.

Responsible of SAC of SC

• Advises the Commission on all matters related to comprehensive development of the Islamic capital market.
• Promotes harmonization of Sharia opinions related to ICM transactions.
• Standardizes Shariah rulings relating to ICM products and services that are examined through research and deliberations.

Approach SAC of SC

• Studies validity of conventional instruments from the Shariah point of view, with a focus on transaction structure, mechanisms, and instrument use, to ensure compliance with Shariah Principles.
• Formulates and develops new financial instruments based on Shariah principles.

Syariah Criteria for Listed Securities

• The SAC of the SC thoroughly examines companies with mixed activities (compliant and non-compliant). Evaluation criteria include public perception and image, the company's core activities, importance and maslahah (benefit), and avoiding umum balwa (common plight), uruf (custom), and non-Muslims' rights.

Benchmark

• 5% benchmark: Used to access the level of mixed activities clearly prohibited. Examples include interest-based activities like conventional banks, gambling, trading in liquor, and pork.
• 10% benchmark: Used to assess contributions involving umum balwa (prohibited elements affecting most people and are hard to avoid). Example – interest income from conventional current accounts or fixed deposits.
• 20% benchmark: Used to assess contributions from mixed rental payment from non-compliant activities. Example – rental from premises involved in gambling or liquor sales.
• 25% benchmark: Assesses contributions from generally permissible activities with maslahah elements, which might affect Shariah status. Examples include hotel operations, resort share trading, and stockbroking.

Test your knowledge on the principles and benchmarks of Islamic finance. This quiz covers topics such as permissible and non-permissible activities, the role of the Securities Commission, and the function of the Shariah Advisory Council. Improve your understanding of Islamic banking transactions and capital market development.