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Shariah Investing Dialogue Series 2020 Series 1 – Investment in the Future: Shariah Fraternity’s Role in Islamic Capital Market

IM Insights
By IM Insights
3 years ago
Shariah Investing Dialogue Series 2020 Series 1 – Investment in the Future: Shariah Fraternity’s Role in Islamic Capital Market

Shariah, Sukuk, Waqf, Provision

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  1. Shariah Investing Dialogue Series 2020 Monday - 2 November 2020 Series 1 – Investment in the Future: Shariah Fraternity’s Role in Islamic Capital Market Positive screening is now becoming a key area in Malaysia, focusing not only on Shariah-compliance, but also on integrating ESG principles into companies’ strategic decision-making, thereby ensuring that Maqasid-al-Shariah gain prominence in investment decisions. Islamic finance industry professionals need to understand and cater to all different groups of investors and customers, from large institutionals all the way to young retail clients. The Shariah fraternity plays an important role in implementing and instilling a Shariah-compliant culture within organisations through education, raising awareness, and ongoing training. A utopsy of Islamic Capital Market: Prof Dr Ashraf Md Hashim started his discussion by highlighting global statistics pertaining to the Islamic finance market, noting that the global Islamic finance asset base, which stood at USD 2.52 trillion in 2018, was expected to increase to USD 3.47 trillion by 2024 according to the Islamic Financial Development Report 2019. In addition, 70% of industry assets in 2018 were held by 520 Islamic banks spread across 72 countries, whilst Sukuk comprised 18% of the global Islamic finance industry in the same year. Prof Hashim urged the Islamic finance market community to unite and coordinate with each other, to ensure greater synergies and propel the industry. Prof Hashim also noted that the global Islamic finance industry accounted for just 0.65% of the total financial sector’s assets across the world, which he deemed insignificant to initiate change. Based on the statistics of the Securities Commission Malaysia as at 31st August 2020, Malaysia’s Islamic capital market stood at MYR 2.2 trillion, accounting for 66% of the country’s total capital market. Prof Hashim noted that, of the country’s total capital market worth MYR 3.2 trillion, the majority was comprised of equity, of which Shariah-compliant equities accounted for a 71% share. Likewise, the fixed income market in Malaysia, valued at MYR 1.57 trillion was also dominated by Sukuk, which held a 63% share. Prof Hashim stressed that assets under management (AUM) needed to be developed, with Islamic AUM accounting for just 24% of the total MYR 0.9 trillion AUM sector in Malaysia. Prof Hashim highlighted that Shariah-compliant companies attracted a wider investor base, both conventional and Islamic. He added that there was room for improvement in the management of Shariah-compliant securities, with some organisations missing out on being classified as Shariah-compliant due to their insufficient efforts to adhere to the threshold guidelines. Prof Hashim further stated that Islamic Exchange Traded Funds (ETFs) and Islamic Real Estate Investment Trusts (REITs) were areas that could PROF. DR. ASHRAF MD HASHIM Chairman of Shariah Committee Bursa Malaysia be improved on. Commenting on Sukuk’s development, Prof Hashim discussed expansion avenues pertaining to the development of Retail Sukuk (which require a minimum investment of MYR 1,000) and Waqf Sukuk, emphasising the need for Malaysia’s Islamic finance industry to work together to develop these instruments. Highlighting additional industry statistics, Prof Hashim commented on the promising outlook for the Shariah market based on industry performance. Between 2010 and September 2020, Shariah market capitalisation was up 46%, whilst the Shariah Average Daily Trading Value was up 235% over the same period. He also noted the performance of Shariah indices that have consistently outperformed the FBM KLCI benchmark index over the past decade. MAKHTAR ABDULLAH CEO Association of Shariah Advisors in Islamic Finance (ASAS) PROF. DR. YOUNES SOUALHI Member of Shariah Committee Bursa Malaysia approval of proposal procedures, review and advice on Shariah verification, and provision of input on industry products. Prof Hashim then responded to an audience question related to the use of Islamic capital market to boost Malaysia’s economy in the wake of the COVID-19 pandemic, particularly with regards to employment. Prof Hashim stated that the Government of Malaysia’s Penjana (National Economic Recovery Plan) Sukuk were a small effort relative to what could be achieved with instruments such as Waqf Sukuk. He noted that the current constraints restricting the uptake of such instruments centred around a lack of investor confidence, which could be overcome with a sound structure supported by Malaysia’s capital market regulation and political willingness. He further discussed the possibility of making Waqf Sukuk a retail instrument to allow investments from a wider investor base, especially that there were funds available in the market waiting for industry experts to find ways to tap into. Regarding Shariah investing principles, Prof Hashim stated that this type of investment was open for everyone, and not limited to the Muslim community. He went on to showcase the overlap between Shariah-compliant investment principles and the Environmental, Social, and Governance (ESG) criteria, concluding that both types of investments had almost the same objectives. Prof Hashim also explained that positive screening was now becoming a key area in Malaysia; a screening focused not only on ensuring that Shariah-compliant companies refrained from prohibited activities such as gambling and Riba (interest), but also that they integrated ESG principles into their strategic decision-making, thereby ensuring that Maqasid-al-Shariah gain prominence in investment decisions. Reiterating the Sustainable & Responsible Investment potential of ESG investing, Prof Hashim Shariah principles are aligned Promote Ethical cited that global equities which were with SRI principles, making Investing Shariah-compliant products Avoidance of illegal, unethical up 4.3% annually on average attractive to SRI investors nature of underlying activities between 2007 and 2019, paled in comparison to ESG investments, which grew 10.2% annually over the same period. Prof Hashim Performance & then listed key Shariah investing Shariah Investing: Quality of Shariah principles, with the main value Instruments Value Proposition Shariah-compliant proposition centred around companies are fundamentally strong sustainable, responsible, ethical, and relatively low-risk investments Larger Investor Base Shariah-compliant investment targeting a larger investor base, instruments cater for both Shariah and non-Shariah with a greater focus on the investors, capturing a larger performance and quality of these investor base Relatively Lower risk Islamic investing instruments. Ending his Shariah-screening process filtering out volatile investment session, Prof Hashim listed out the key instruments tasks assigned to Bursa Malaysia’s Shariah Committee, which included the provision of advice in product structuring, evaluation and
  2. Role of the Shariah Fraternity : The second session of this Series 1 consisted of a panel discussion on the importance and relevance of the Shariah fraternity, its role and contribution to Malaysia’s Islamic finance industry. Prof Hashim served as a moderator for this leg of the discussion and invited Makhtar Abdullah to share his insights on the efforts made by the Association of Shariah Advisors in Islamic Finance (ASAS) for the development of Islamic finance in Malaysia. to work effectively within Bursa Malaysia, these POs must adhere to the Shariah Compliance Assurance Framework (SCAF), a governance framework encompassing guidelines, to ensure Shariah compliance in audit and risk management. A key best practice followed by POs is ensuring adequate training to all staff, particularly the Heads of Dealings and Operations, to reinforce the do’s and don’ts of Shariah investments and to facilitate sound investment management. Part of this role is making sure to follow best practices such as disposal of non-Shariah compliant securities, and to have a Shariah advisor providing advice within a defined Shariah governance framework. Prof Soualhi went on to describe the role of the Shariah advisors and the ways in which POs should deal with them. First, he noted that POs should ensure that Shariah advisors have free access to information and data needed for sound decision-making; second, that Shariah advisors should be given full independence without any interference from the law; third, that the opinions of Shariah advisors should be well documented for future reference; and lastly, that audits transaction. POs were also expected to pay out Zakat. The most important best practice guideline noted by Prof Soualhi was the requirement to have an audit system to ensure internal control, compliance, and transparency. Regarding the role of the Shariah fraternity in the Islamic stockbroking space, Prof Soualhi noted that One of the key developments cited by Abdullah this went beyond the realms of Shariah governance. was the introduction of two certification The Shariah fraternity primarily comprises Shariah programmes, announced in 2017, catering to advisors and Shariah committees. It was important Shariah-educated persons as well as those for the Shariah committee to first, clearly define the without any Shariah background. The aim of terms and conditions of their appointment in order these courses was to motivate professionalism to assist the Shariah advisors to achieve their goals, amongst Shariah advisors, equip them with the as well as the goals of the PO. Prof Soualhi then skill set and knowledge required to propel the highlighted four key areas that the Shariah industry, as well as to build up a talent pool to community should focus on to play a more prepare a succession plan and serve effectively responsible role beyond mere Shariah governance. in a more challenging ecosystem. Advising on Shariah Clarifying First, the Shariah community can assist by instilling Abdullah went on to describe the compliance within SAC rulings a compliance culture within the organisation. course content and delivery a defined SGF Second, the Shariah community can drive the programme, noting that the modules change towards value-based intermediation (VBI) were constantly revised to ensure up-to-date within the organisation, focusing on certificate programmes. Maqasid-al-Shariah. The third area of contribution for the Shariah community would be towards Abdullah highlighted that there was still a long streamlining and enhancing micro and macro models way for the Islamic finance industry to go given of Islamic finance, by aligning Islamic financial its niche size compared to the global financial activity (micro factors) of the organisation with the market, even after 50 years of existence. First, he macro objectives of the country, namely financial and noted the need to prepare for the future, with a monetary stability, economic development, and focus on digitised banking, ESG and green enhancement of the real economy. The final key investing, as there was now more Clearing Overseeing area of support would be the promotion of chatter around social finance ambiguities implementation Islamic Fintech in Islamic stockbroking to related to involvement. Added to this, the of Shariah facilitate investments and reduce Shariah rulings requirements on-going COVID-19 pandemic also transactional costs. This could be achieved brought in a new dimension to strategy using blockchain, artificial intelligence, big data planning. Abdullah noted the widening analysis, and Internet of Things (IoT) according to Prof shareholder base that now included larger should be used to ensure that Shariah advisors’ opinions have Soualhi. institutionals as well as younger investors. He been considered and their decisions have been stressed that the Islamic finance industry implemented. Concluding the discussion, Prof Soualhi responded to professionals needed to understand and cater to an audience question pertaining to the role of the all these different groups of investors and Prof Soualhi then explained the best practices expected by Shariah fraternity on implementing and instilling a customers. He reiterated the need to upscale Bursa Malaysia from POs with regards to compliance of Shariah-compliant culture within organisations. Prof professionals, consisting mainly of Shariah operational systems, procedures, and internal controls. He Soualhi noted that the key element was to educate scholars and Islamic finance practitioners, started with segregation of funds to ensure that any monies and raise awareness to promote the acceptance of beyond the realms of banking or finance, citing pertaining to Shariah-compliant stockbroking, whether used Shariah governance and compliance, which should that Shariah committees should be well for funding or investing, were clean and interest-free. Prof be followed by consistent, and ongoing training. equipped to respond with clear Fatwas and Soualhi also emphasised that investments made by POs Added to this, Prof Soualhi noted that it was crucial to references as needed. should always be Shariah-compliant and facilitated via monitor this Shariah-cultural acceptance from time contract notes that serve as a proof of completion of the to time by assessing the levels of awareness, Shariah Compliance and Stockbrokerage: understanding, and compliance across organisations Prof Hashim then went on to invite the final Shariah fraternity can assist in: panellist, Prof Dr Younes Soualhi, to talk Watch again on IslamicMarkets.com about the effect of Shariah compliance rulings and practices on the stockbroking sector. Prof Soualhi started off his discussion by sharing his views on the role of the Shariah advisors and Shariah committees to Developing Streamlining Materializing ensure Shariah compliance of Islamic Promoting VBI, ESG, micro and Shariah financial institutions in capital markets, Islamic SDGs, macro models compliance with a key focus on Shariah screening. Role of Shariah Advisors maqasid based models culture Highlighting participating organisations (POs) in the stockbroking industry, Prof Soualhi noted that in order for Islamic POs Brought To You By Platform Partner of Islamic finance Knowledge Partners Fintech