ISLAMIC EQUITY MARKET, SHARIAH STOCK SCREENING & PREFERENCE SHARES

Transcription

1 ISLAMIC EQUITY MARKET, SHARIAH STOCK SCREENING & PREFERENCE SHARES Prof Dato Dr. Mohd Azmi Omar Level 4 Administration Building, International Islamic University Malaysia Gombak Selangor Malaysia

2 Contents Principles of Islamic equity investment Islamic view on Ordinary share Development in the Malaysian Islamic Capital Market Islamic Equity Market Shari'ah Compliant stocks in Bursa Malaysia Screening Methodology for Shari'ah-Compliant Stocks Securities Commission of Malaysia Dow Jones Islamic Market Indexes Dow Jones-RHB Islamic Malaysia Index FTSE Global Islamic Index Series S&P Shariah Indices Guidelines on investment in Non-Shari'ah compliant securities Preference shares Convertible bonds 2

3 Principles of Islamic equity investment Prohibition of riba (no guaranteed fixed return) Prohibition of gharar (uncertainty withy deceit) and maysir (gambling) Primary business activity must be in line with Shari ah Majority of assets must be illiquid Non-permissible income must be below a specified threshold 3

4 Speculation & Gambling Stock Market provides the avenue for firms to raise funds, for investor to invest their surplus funds. One needs to predict the future value of stock prior to making any decision to buy or sell the stocks Is speculation gambling? The Quran clearly prohibit us from gambling as illustrated by the following verses relating to games of chance or gambling, referred to in Arabic as maysir; Allah SWT says; 4

5 Speculation & Gambling They will ask thee about intoxicants and games of chance. Say: In both there is great evil as well as some benefit for man; but the evil which they cause is greater than the benefit which they bring." Quran (2: 219) The Messenger of Allah (SAW) also forbade us from gambling as illustrated in the following Hadith; From Abu Hurayrah (RA), that he said, "The Messenger of God (S) forbade the 'sale of the pebble' [hasah] [sale of an object chosen or determined by the throwing of a pebble], and the sale of al-gharar. [Sahih Muslim] 5

6 Speculation & Gambling Ibn Taymiyah s opinion on the above Hadith is that gharar as the consequence of which is unknown and goes further to claim that selling it involves maysir, which is gambling. Maysir or gambling is prohibited in Islam because it causes enmity and hatred and also involves consuming property bi-al-batil, which is a type of oppression. Being given the obvious prohibition of gambling in both the Quran and the Hadith of the Prophet (SAW), it is of utmost importance to determine whether speculation in the stock market is similar to gambling 6

7 Speculation & Gambling Kamali (1996) defines speculation as consisting of "the intelligent and rational forecasting of future price trends on the basis of evidence and knowledge of past and present conditions". Based on the Quranic verses and the Hadith of the Prophet (SAW), Ibn Taymiyah (ra) pointed out that if a sale contains gharar and devours the property of others, it is the same as gambling, which is clearly forbidden. Therefore, for a transaction to be equated to gambling, it must involve the devouring and unlawful appropriation of the property of others. Speculative risk taking in commerce, which involves the investment of assets, skills and labor is not similar to gambling. This is because the buyer is engaged in a transaction aimed at making profit through trading and not through dishonest appropriation of the property of others. 7

8 Speculation & Gambling El-Ashkar (1995) defined speculation as "the practice of a) using available information to b) anticipate future price movements of securities so that c) an action of buying or selling securities may be taken with a view to d) buying or selling securities in order to e) realize capital gains and/or maximize the capitalized value of security-holdings. It is a process that relies on the analysis of a lot of economic and financial data, companies' financial reports, political decisions, information about management skill and aptitude and the personal profile of the decision makers. That is to say, speculation is an activity that requires a great deal of knowledge and skills. Therefore, speculation in stock markets cannot be equated to gambling. 8

9 The sale of gharar is said to lead to maysir (gambling) which leads to oppression and is therefore prohibited in Islam. It is evident that gharar is not present in speculation in stock markets as each party is clear to the quantity, specification, price, time and place of delivery of the object. Moreover, the object of the transaction, which is the purchased security, is available in the market at the time of transaction and is, bound to be available at the time of delivery. Therefore, speculation has no element of gharar and, hence, does not lead to maysir. 9

10 Pro and Cons of Speculation The above discussion has proved that although speculation in the stock markets may look like gambling, yet it is by no means similar to gambling. Its positive side is that it can help stabilize prices and activate a market where there is thin trading. It can also provide signals to less-informed investors upon which to act. The negative effect of speculation is that excessive amount of it may cause volatile price movements in the market. It can thus be concluded that excessive speculation should not be allowed, but a reasonable degree of it be permitted. Quantitative limits on daily trading volume and legislative guidelines may help contain speculation within healthy bounds. 10

11 Fiqh View of Investing in Ordinary Shares Permissible if the main business of the company is in compliant with Shari ah rulings, then to purchase, hold or sell its shares is permissible even if the company was to undertake prohibited activities such as borrowing money and/or invest its money on the basis of interest, the company can still be invested provided they fulfil certain criteria. (Islamic Fiqh Academy, 1992) 11

12 Each and every action of the company cannot be attributed to every shareholder in his/her individual capacity A shareholder may raise his objections to certain company transactions that may run contrary to Shari ah during the annual general meeting but these objections may be overruled by the majority of the shareholders the responsibility of committing a non-halal activity such as borrowing and investing money on the basis of interest lies with those who commit such acts, it does not render the whole company to be non-halal or nonpermissible 12

13 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) YEAR MILESTONES 1990 Shell MDS Sdn Bhd issued the first Islamic bond 1993 Arab-Malaysian Unit Trust Bhd issued the first Islamic equity unit trust fund (Arab-Malaysian Tabung Ittikal) 1994 BIMB Securities Sdn Bhd, the first full-fledged Islamic stockbroking company, was established 13

14 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) 1995 Securities Commission (SC) Malaysia established the Islamic Capital Market Unit 1996 SC established the Shari'ah Advisory Council (SAC) Rashid Hussain Bhd (RHB) launched Malaysia s first Islamic equity index, comprising Shari'ah compliant shares of Bursa Malaysia main board companies 1997 Khazanah Nasional Bhd launched the Khazanah Murabahah Bond, which is a zero coupon bond based on murabahah and bai al-dayn concepts SC launched an official SAC list of Shari'ah compliant securities that are traded on Bursa Malaysia. The list is updated every April and October 14

15 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) 1999 Bursa Malaysia launched Malaysia s second Islamic equity index, the Kuala Lumpur Shari'ah Index (KLSI), comprising all Shari'ah compliant shares of Main Board companies 2000 SC imposed the requirement for issuers of Islamic bonds to engage independent Shari'ah advisers, as stipulated in the Guidelines on the Offering of Private Debt Securities RHB Unit Trust Management Bhd launched the first Islamic bond fund SC launched a dedicated Islamic Capital Market section on its website 2001 The Capital Market Masterplan was launched. One of the strategic initiatives was to establish Malaysia as an international Islamic capital market centre 15

16 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) 2002 Kumpulan Guthrie Bhd issued a US$150 million sukuk ijarah; the first global corporate bond issue. It was listed on the Labuan International Financial Exchange Malaysian government issued a world s first global sovereign Islamic bond, sukuk ijarah, worth US600 million SC imposed the requirement for the registration of Shari'ah individuals/advisers for Islamic unit trust funds MBf Unit Trust Management Bhd launched the first Shari'ah index fund SC published a book: Resolutions of the Securities Commission Shari'ah Advisory Council 16

17 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) 2002 Malaysian government, in its Federal Budget 2003, allowed tax deduction for 5 years on expenses incurred in the issuance of Islamic bonds, based on the Shari'ah principles of ijarah, mudharabah and musharakah 2003 Malaysian government, in its Federal Budget 2004, allowed tax deduction for 5 years on expenses incurred in the issuance of Islamic bonds, based on the Shari'ah principle of istisna 2004 The International Organization of Securities Commission (IOSCO) s Islamic Capital Market Task Force, chaired by SC Malaysia, released the Islamic Capital Market Fact Finding Report as an IOSCO public document in July 2004 SC released the Guidelines on the Offering of Islamic Securities 17

18 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) 2004 Ingress Corp Bhd issued the first domestic corporate Islamic bond, which was modelled on the Malaysian Global Sukuk Sarawak Corporate Sukuk Inc, a special purpose vehicle established by the Sarawak Economic Development Corporation launched a maiden 5-year US$350 million global Sukuk Ijarah in the form of floating rate trust certificates that will mature in The sukuk is listed and traded on LFX International finance Corp (IFC), the private arm of the World Bank issued RM500 million Islamic bonds, which was the first issuance of ringgit-denominated Islamic bonds by a supranational body 18

19 Development in the Malaysian Islamic Capital Market (source: Securities Commission Malaysia) 2004 Additional tax measures were announced in the Budget 2005 to remove any tax or duty on Islamic capital market products, provided such products were approved by the SAC of the SC 2005 The World Bank issued RM760 million Islamic bonds that will mature in This ringgit-denominated issue is the largest supranational deal in the ringgit bond market 19

20 Islamic Equity Market Islamic equity market in Malaysia showed tremendous progress The number of Shari ah compliant shares has increased significantly from 371 in 1997 to 826 in April 2005 In terms of percentage of Shari ah compliant stocks in Bursa Malaysia, 1997 recorded only 57% whilst in April 2005 the percentage has increased to 84% 20

21 Shari ah compliant stocks in Bursa Malaysia Number of Stocks Number of Shari'ah Compliant Stocks in Bursa Malaysia Jun- 97 Dec- 97 May- 98 Sep- 98 Jan- 99 May- 99 Sep- 99 Sep- 00 Sep- 01 Sep- 02 Sep- 03 Sep- 04 Apr- 05 Year No of Shariah Compliant Stocks No of Non Shariah Compliant Stocks 21

22 Shari'ah Compliant Stocks in Bursa Malaysia Percentage of Syariah- Compliant Stocks 84% Percentage of Non Syariah- Compliant Stocks 16% As of April

23 Shari'ah Compliant Stocks in Bursa Malaysia (As of April 2005) Main Board / Second Board / MESDAQ Approved Securities Total Securities Percentage of Approved Securities Consumer Products Industrial Products Mining Nil 1 Nil Construction Trading/Services Properties Plantation Technology Infrastructure (IPC) Finance Hotel Nil 5 Nil Trusts Close End Fund Nil 1 Nil TOTAL

24 Shari'ah Compliant Stocks in Bursa Malaysia (As of 25 May 2007) Main Board / Second Board / MESDAQ Approved Securities Total Securities Percentage of Approved Securities Consumer Products Industrial Products Mining Construction Trading/Services Properties Plantation Technology Infrastructure (IPC) Finance Hotel Nil 5 Nil Close End Fund Nil 2 Nil TOTAL 875 1,

25 Screening Methodology for Shari'ah-Compliant Stocks Currently there is no international Shari'ah standard for stock screening Different funds or fund managers utilise different standards based on their Shari'ah council In Malaysia we have the list issued by Securities Commission, Dow Jones-RHB Islamic Malaysia Index and FBM Shariah Index At the international level we have the Dow Jones Islamic Market Indexes, FTSE Global Islamic Index Series and S&P Islamic Index Series 25

26 Screening Methodology for Shari'ah-Compliant Stocks Rules to ensure that ordinary shares are Shari'ah compliant The stock screening process is divided into two stages: Evaluation in terms of company activities, products and industry Computation of a set of financial ratios & compare them against specified benchmarks The screening process begins by screening the company in terms of its activity, products and industry alcohol, tobacco, pork-related products, conventional financial services, weapon and defense, entertainment (hotels, casinos/gambling, cinema, pornography, music, etc.) are excluded 26

27 Screening Methodology for Shari'ah-Compliant Stocks Next, a set of measures called financial filters is also used to refine the selection. The filters use a number of financial ratios and compare them against their respective benchmarks to weed out non- Shari ah compliant stocks The data for ratios are taken from Balance Sheet and Income Statement. In the case of Dow Jones Indexes they use stock market data as well In general these ratios can be categorised as liquid assets, interest income and leverage The ratio benchmark ranges from: Liquid asset: 17% to 49% Interest income: 5% to 15% Leverage: 30% to 33% 27

28 Screening Methodology for Shari'ah-Compliant Stocks : Securities Commission of Malaysia Securities Commission of Malaysia applied additional criteria to companies which are involved in multiple business, i.e., companies whose business activities comprise both Shari'ah permissible and non-permissible elements. The analysis is done at the holding company, subsidiary company and associate company levels. The additional criteria include: Core activities of the company are activities not against the Shari'ah principles as mentioned earlier Haram element is small compared to core activities, i.e., compared against benchmark Public image/perception of company is good Core activities of the company are important and of public interest (maslahah) to the muslim ummah and the country Proportion of haram element is small and in matters such as umum balwa (common plight), uruf (customs) and the rights of the non-muslim community which are accepted by Islam 28

29 Screening Methodology for Shari'ah-Compliant Stocks Securities Commission of Malaysia It maybe possible that a company s main business is Shari ah compliant but the revenue from the subsidiary whose activities are not Shari ah compliant may lead to that company being considered as non-shari ah compliant 29

30 Screening Process of SAC, Securities Commission, Malaysia Stage 1 Stage2 Stage 3 Activity, Industry & Product Financial services based on riba (interest) Gambling/gaming Manufacture and / or sale of non-halal products Manufacture or sale of tobacco-based products or related products Conventional insurance (gharar) Entertainment Stockbroking or share trading in Shari ah noncompliant securities Other activities deemed nonpermissible Quantitative Analysis TO and PBT of nonapproved activities SOP of non-approved securities Interest Income Dividend received from investment in non-approved securities All of the above must be below certain threshold Image public perception or image of the company, importance of the companies to ummah, uruf (custom), umum balwa (common plight), rights of nonmuslims etc. No Yes Yes No Qualitative Analysis No Permissible Drop Yes Drop Drop * List is updated every April and October 30

31 SC Stage 2 : Quantitative Analysis Consolidate information on : 1. Group TO 2. Group PBT 1. TO and PBT of non approved activities 2. SOP of non approved activities 3. Interest income 4. Dividend received from investment in non approved securities Compute percentage of contribution : 1. TO and PBT of non permissible activities vs group TO and PBT 2. SOP of non permissible activities vs group PBT 3. Interest income vs group TO 4. Dividend received from investment in non approved securities vs group PBT Compare the percentages against financial benchmark Non-approved if exceeds financial benchmark (Source: Nik Ruslin, SC) 31

32 SC - Financial benchmarks The 5-percent benchmark to assess the level of mixed contributions from the activities that are clearly prohibited such as riba (interest-based companies like conventional banks), gambling, liquor and pork The 10-percent benchmark to assess the level of mixed contributions from the activities that involve the element of umum balwa which is prohibited element affecting most people and difficult to avoid e.g interest income from fixed deposits in conventional banks and tobacco-related activities 32

33 The 20-percent benchmark This benchmark is used to asses the level of contribution of mixed rental payment from Shariah noncompliant activities, such as rental payments from premises used in gambling, sale of liquor, etc. The 25-percent benchmark to assess the level of mixed contributions from the activities that are generally permissible according to Shari ah and have an element of maslahah to the public, but there are other elements that may effect the Shari ah compliance status of these activities for e.g hotel and resort operations, share trading, stockbroking, as these activities may also involve other activities that are deemed non-permissible to the Shari ah 33

34 Fiqh Justification for Shariáh benchmarks (source: SC Malaysia) Status of mixed business companies No historical precedent Cited Ibnu Subki in Al-Ashbah wa al-naza ir to rule as prohibited something that is a mix of the permissible and the prohibited is ihtiyat (precautionary measure) and it is not necessarily prohibited. SC Malaysia took into accounts other Fiqh principles to support their case These include maslahah, umum balwa, urf khas min asalib iqtisodiyah, fasaduz zaman and huquq ghair muslimin 34

35 Fiqh Justification for Shariáh benchmarks (source: SC Malaysia) (cont ) In addition they also cited Ibnu Qayyim who wrote in his book Bada ie al-fawa id about the nature of prohibited property which is of 2 kinds: Prohibited because of its zat (nature), for, e.g., pork, liquor. Hence mixing of meat slaughtered by Muslim and Non Ahli Kitab is prohibited. Prohibited due to other reasons such as the means or way it is earned or acquired. For e.g. money in itself is okay but the manner it is acquired such as by robbery is not acceptable. Shares of companies are by nature acceptable but shares of mixed business companies may not be acceptable 35

36 Shariah Benchmark 50% rule Utilize the fatwa concerning silk mixed with common thread. This is based on the hadith of the Prophet saw: The Prophet saw took a piece of silk and placed it on his right. He took some gold and placed it on his left. Then he said: Both these things are prohibited unto men among my followers, but permissible for the women If it is pure silk then it is prohibited for men to wear the silk cloth but if the cloth is mixed with 50% or less silk and the remaining common thread then it is permissible 36

37 Shariah Benchmark (cont..) One Third rule Utilize the analogy of hibah (gift) where a person can bequeath a maximum of one third of his property as gift to an unrelated person Benchmark based on Ghabn Fahish (extraordinary margin or profit or gain) Describes gain through cheating and manipulation (tanajush) 37

38 Shariah Benchmark (cont..) Ghabn fahish accompanied with tanajush is not permissible Hanafi mazhab ruled that the upper limits for ghabn fahish are as follows: 5% for ordinary goods 10% for animals used for riding and 20% for fixed assets 38

39 Case Study 1 : Kaya Raya Holdings Berhad Principal activity Construction and civil engineering Kaya Raya Holdings Berhad Related information Subsidiary KRH Cons. Sdn. Bhd Lai Kuay Sdn. Bhd Strong Heart Sdn. Bhd Group info : Group TO : RM10 million Group PBT : RM 5 million Associated Kapur Barus Sdn. Bhd Kejuruteraan Siaga Sdn. Bhd Non-permissible activities info : TO tobacco : RM 900,000 PBT tobacco : RM 400,000 Tobacco business (Source: Nik Ruslin, SC) 39

40 Case study 1 : Pre-compliance result Non-permissibles Percentage of tobacco to Group TO Calculation Quantitative result RM900,000 / RM10.0 mil 9% Percentage of tobacco to Group PBT RM400,000 / RM5.0 mil 8% Benchmark for tobacco : 10% of Group TO or Group PBT Pre-compliance result : Approved (contribution from tobacco below the benchmark) (Source: Nik Ruslin, SC) 40

41 Case Study 2 : Teguh Tegap Holdings Berhad Principal activity Manufacturing of furniture and other related industry Interest income Teguh Tegap Holdings Berhad Related information Subsidiary Cengal Biru Sdn. Bhd Nyatoh Tua Sdn. Bhd Merbau Siam Sdn. Bhd Group info : Group TO : RM 2 million Group PBT : RM 500,000 Associated Plywood Sdn. Bhd Nasib Baik Sdn. Bhd Non-permissible activities info : Interest income : RM 220,000 SOP gaming : RM 24,000 (Source: Nik Ruslin, SC) Gaming business 41

42 Case study 2 : Pre-compliance result Non-permissibles Percentage of interest income to Group TO Percentage of gaming to Group PBT (SOP) Calculation Quantitative result RM220,000 / RM2.0 mil 11% RM24,000 / RM500, % Benchmark for interest income : 10% of Group TO Benchmark for gaming : 5% of Group TO / Group PBT Pre-compliance result : Non-approved (contribution from interest income exceeds the benchmark) (Source: Nik Ruslin, SC) 42

43 Case Study 3 : Blind Spot Berhad Principal activity Construction Subsidiary Liquor business Go Ahead Sdn. Bhd Blind Spot Berhad Ho Hap Sdn. Bhd Gantang Besar Sdn. Bhd Related information Group info : Group TO : RM 10 million Group PBT : RM 5 million Non-permissible activities info : TO liquor : RM 400,000 PBT liquor : RM 120,000 Associated Hud Hud Sdn. Bhd Garuda Sdn. Bhd TO gaming : RM 200,000 PBT gaming : RM100,000 Gaming business (Source: Nik Ruslin, SC) 43

44 Case study 3 : Pre-compliance result Non-permissibles Percentage of liquor to Group TO Percentage of liquor to Group PBT Percentage of gaming to Group TO Percentage of gaming to Group PBT Calculation Quantitative result RM400,000 / RM10.0 mil 4% RM120,000 / RM5.0 mil 2.4% RM200,000 / RM10.0 mil 2% RM100,000 / RM5.0 mil 2% Benchmark for liquor and gaming : 5% of Group TO / Group PBT Contribution from non-approved activities : Group TO : (4% + 2%) = 6% Group PBT : (2.4% + 2) = 4.4 Pre-compliance result : Non-approved (contributions from non-approved activities [liquor & gaming] exceed the benchmark) (Source: Nik Ruslin, SC) 44

45 Screening Process of Dow Jones Islamic Index (before 2001) Stage 1 Stage 2 Financial Ratio Filters Activity, Industry and Product Non-Permissible Activities: Pork Production Non-Halal Food Products Alcohol Beverages Gaming Interest based Financial Institution Entertainment Arms, Defense Tobacco Activities Contrary to Islam No Total Debt to Total Asset Ratio 33% Account Receivables to Total Asset Ratio 47% Non-Operating Interest Income to Operating Income 9% No Yes Permissible Yes Drop Drop * List is updated every quarter 45

46 Screening Process of Dow Jones Islamic Index (2001) Stage 1 Stage 2 Activity, Industry and Product Financial Ratio Filters Non-Permissible Activities: Pork Production Non-Halal Food Products Alcohol Beverages Gaming Interest based Financial Institution Entertainment Arms, Defense Tobacco Activities Contrary to Islam No Total Debt to Trailing 12-Month Moving Average Market Capitalization 33% Account Receivables to Total Asset Ratio 45% Cash + Interest Bearing Securities to Trailing 12-Month Moving Average Market Capitalization 33% No Yes Permissible Yes Drop Drop * List is updated every quarter 46

47 Screening Process of Dow Jones Islamic Index (2003) Stage 1 Stage 2 Activity, Industry and Product Non-Permissible Activities: Pork Production Non-Halal Food Products Alcohol Beverages Gaming Interest based Financial Institution Entertainment Arms, Defense Tobacco Activities Contrary to Islam No Financial Ratio Filters Total Debt to Trailing 12-Month Moving Average Market Capitalization 33% Account Receivables to Trailing 12-Month Moving Average Market Capitalization 33% Cash + Interest Bearing Securities to Trailing 12-Month Moving Average Market Capitalization 33% No Yes Permissible Yes Drop Drop * List is updated every quarter 47

48 Dow Jones Islamic Market Indexes Introduced in Subset of Dow Jones Global Indexes. 40% of DJ Global Index s market cap. 60 indexes. 6 Islamic scholars. 48

49 Dow Jones Islamic Market Indexes The DJIMI family includes global, regional, country, industry, and market-cap-based indexes. Global Indexes DJIMI DJIM Large-Cap Index DJIM Mid-Cap Index DJIM Small-Cap Index DJIM - Ex. U.S. Index DJIM Developed Index DJIM Developed - Ex. U.S. Index DJIM Emerging Markets Index Titans (Blue-Chip) Indexes DJIM Titans 100 Index DJIM Europe Titans 25 Index DJIM Asia/Pacific Titans25Index DJIM U.S. Titans 50 Index Global Industry Indexes DJIM Basic Materials Index DJIM Consumer Goods Index DJIM Consumer Services Index DJIM Oil & Gas Index DJIM Financials Index DJIM Health Care Index DJIM Industrials Index DJIM Technology Index DJIM Telecommunications Index DJIM Utilities Index 49

50 Dow Jones Islamic Market Indexes U.S. Indexes DJIM U.S. Index DJIM U.S. Large-Cap Index DJIM U.S. Mid-Cap Index DJIM U.S. Small-Cap Index Asia/Pacific Indexes DJIM Amana Sri Lanka Index DJIM Asia/Pacific Index DJIM Asia/Pacific Large-Cap Index DJIM Asia/Pacific Mid-Cap Index DJIM Asia/Pacific Small-Cap Index DJ-JS Pakistan Islamic Index Specialty Indexes DJIM Sustainability Index DJ DFM Index DJ DFM Titans 10 Index Europe and Eurozone Indexes DJIM Europe Index DJIM Europe Large-Cap Index DJIM Europe Mid-Cap Index DJIM Europe Small-Cap Index DJIM Euro Index DJIM Euro Large-Cap Index DJIM Euro Mid-Cap Index DJIM Euro Small-Cap Index Other Country/Regional Indexes DJIM Canada Index DJIM U.K. Index DJIM Japan Index DJIM BRIC Index DJIM China Offshore Index DJIM Turkey Index 50

51 Screening Process of FTSE Global Islamic Index Series (In collobration with TII prior to 2006) Stage 1 Stage 2 Financial Ratio Filters Activity, Industry and Product Non-Permissible Activities: Pork Production Non-Halal Food Products Alcohol Beverages Gaming Interest based Financial Institution Entertainment Arms, Defense Tobacco Activities Contrary to Islam No Total Interest Bearing Debt to Total Asset Ratio 33.33% No Yes Permissible Cleanse tainted dividend Drop Yes Drop * List is updated every 51 quarter

52 Screening Process of FTSE Global Islamic Index Series (In collobration with Yasaar, 2006 onwards ) Stage 1 Stage 2 Financial Ratio Filters Activity, Industry and Product Non-Permissible Activities: Pork Production Non-Halal Food Products Alcohol Beverages Gaming Interest based Financial Institution Entertainment Arms, Defense Tobacco Activities Contrary to Islam No 5 ratios are computed No Yes Permissible 5% Cleanse tainted dividend Yes Drop Drop * List is updated every 52 quarter

53 FTSE Global Islamic Index Series Introduced in Subset of FTSE All-World Index universe. 5 indexes. Shariah Board with Yasaar Research Inc. 53

54 FTSE Global Islamic Index Series FTSE Global Islamic Index FTSE Americas Islamic Index FTSE Europe Islamic Index FTSE Pacific Basin Islamic Index FTSE South Africa Islamic Index 54

55 Screening Process of S&P Shariah Indices Stage 1 Stage 2 Activity, Industry Financial Ratio Filters and Product Excludes: 4 ratios Pork Production Non-Halal Food Products No Alcohol Beverages Gaming Interest based Financial Institution Entertainment Arms, Defense Tobacco Gold & silver trading as cash on deferred basis No Activities Contrary to Islam Yes Drop Yes Permissible Cleanse tainted dividend Drop * List is updated every 55 quarter

56 S&P Shariah Indices Introduced in Subset of S&P 500, S&P Europe 350, and S&P Japan 500 universes. 60% of parent index s market cap. 3 indexes. Shariah Board with Ratings Intelligence Partners. 56

57 Screening Process Of Islamiq.com Stage 1 Stage2 Stage 3 Activity, Industry & Product Non-Permissible Activities: - Pork Production - Non-Halal food Products - Alcoholic Beverages -Gaming - Interest-based Financial Institutions - Entertainment - Arms, Defense - Tobacco - Activities contrary to Islam Interest Income Total Interest Leverage & Asset Liquidity No Income 5% of Total conventional company Gross Yes Debt to Equity Total Revenues ratio 30% Yes Note: Interest expense should not be deducted from this amount No Cash and short term investments to Total Assets Ratio 45% No Permissible Drop Yes Drop Drop 57

58 Financial Filters 58

59 Islamic Stock Indices Comparison Dow Jones Index Market FTSE SI Index Review Annual review in June Annual review in September S&P SI Semi-annual review in March and September Composition Review Component Weightings Review Computation Quarterly review Changes implemented on the 3 rd Friday in March, June, September and December Quarterly update Changes > 10% in number of shares, updated Immediately Float-adjusted valueweighted Quarterly review Changes implemented on the 3 rd or the 2 nd Friday in March, June, September, December (2 nd Friday only applicable for S&P Japan 500 Shariah) Quarterly update Changes > 5% in number of shares, updated immediately Semi-annually review Changes implemented on the 3 rd Friday in March and September. Semi-annually update Float-adjusted Value-weighted 59

60 Comparison between Shari ah compliant securities of SC Malaysia and Dow Jones-RHB Islamic Malaysia as of May 2005 Number of Shari ah Compliant Stocks Number of Stocks in Bursa Malaysia SC % Percentage of Shari ah Compliant Stocks DJ-RHB % 60

61 Shari ah compliant securities which are subsequently considered as Non-Shari ah compliant Action to be taken by the investor/fund manager : On the announcement date Price of share > original investment cost Action: liquidate immediately. Any capital gain can be kept by the investor Price of share < original investment cost May hold the share until price of share equals to original investment cost Liquidate when total dividends received (if any) together with the market price of the non-approved share equal the original investment cost 61

62 Shari ah compliant securities which are subsequently considered as Non-Shari ah compliant After the announcement date (due to inadvertant mistake) Price of share > original investment cost Liquidate immediately. Any profit (the difference between original investment cost and closing price of announcement date) can be kept Residual Profit (the difference between disposal price and closing price of announcement date) to be channelled to charitable bodies Price of share < original investment cost May hold the share until price of share equals to original investment cost Liquidate when total dividends received (if any) together with the market price of the non-approved share equal the original investment cost 62

63 Example Assuming investor holds the share and dispose on 20 th May 2005 Investment Cost (20 January 05) Announcement date (29 April 05) Disposal price (20 May 05) Kept by investor (RM1.50) Channelled to charitable bodies (RM1.00) Investment cost = RM2.50/share Closing price on the announcement date = RM4.00/share Disposal Price = RM5.00/share Dividend received on 15 May 05 = RM0.50/share Capital gain at announcement date =RM1.50/share (kept by investor) Difference between disposal price and and closing price on announcement date = RM 1.00/share (channelled to charitable bodies) Dividend received can be kept by the investor Question: What is the right approach if the disposal price on 20 th May 2005 is RM2.00? 63

64 Non-Shari ah compliant securities which are advertently/inadvertently bought by Shari ah fund Must be disposed within a month of knowing the status of the securities Any capital gain or dividend received during or after the disposal of the securities has to be channeled to charitable bodies Investor has a right to only obtain the original investment cost 64

65 Purification of Income Investor/Unit trust fund receives income from invested companies in the form of dividend and capital gain. Not all income are considered clean. Some are derived from non halal sources such as interest income Purification of income requires identifying the non halal portion of income received from invested companies and deducting it from the total income prior to distribution The income net of purification is then distributed to the investors 65

66 Purification of Income The tainted income cannot be distributed to investors but instead donated to charities It is also possible for the fund to allow discretion to the investor in deciding the recipient charitable organization No consensus among Shari ah scholars in implementing purification No standard available from AAOFFI FTSE GII recommends 5% of the dividend received is taken out and given to charities S&P SI provides the following formula to estimate tainted dividend 66

67 Div*(Non-permissible Revenue/Revenue) 67

68 Preference Shares (saham Preferen) Malaysian Companies Act 1965 has defined preference share as a share that does not give a right to the shareholders to vote at its general meeting or any right to participate in any distribution of the company that has stated the amount, whether through dividends, redemption, dissolution or otherwise 68

69 Preference Shares (saham Preferen) The characteristics of a preference shares are as follows: Predetermined dividend Higher entitlement to assets if business is liquidated No voting rights 69

70 Preference Shares (cont.) OIC Fiqh academy ruled that preference shares are not permissible Syariah Advisory Council of Malaysian Securities Commission ruled that noncumulative preference shares are permissible based on tanazul where the right to profit of the ordinary shareholder is given willingly to a preference shareholder. 70

71 Convertible Stocks/Bonds Preference shares or bonds that will be converted into ordinary shares after a predetermined period Value of future conversion is uncertain although the conversion ratio, i.e., the number of ordinary shares that will be given upon conversion, is fixed No formal fatwa given although most Shari ah scholars are concerned about element of gharar 71

72 Shareholder Rewards Cash dividends No objections from Shari ah Bonus issue or stock dividend Shares in lieu of cash No objections from Shari ah Rights issues Current shareholders given special right to purchase new shares at below market price Acceptable to Shari ah 72

73 Shareholder benefits or perks Rewards given to shareholder in kind rather than cash, for e.g., free food or food coupon, hotel stays etc Acceptable to Shari ah 73

74 Wallahuwa alam Thank You