COMPONENT OF ISLAMIC CAPITAL MARKET

 

         As we know, the Islamic capital market has been categorized into two, namely the equity market and the debt market. The equity market is where stocks are purchased and traded. It provides companies with funds to expand their operations and investors with a stake in the company with the possibility to profit from their investment dependent on the company's future performance. The equity market is thought to be fundamentally dangerous, despite the fact that it has the potential to provide a higher return than other investments. The debt market is a marketplace where investors can buy and sell loans. Bonds do not have a single physical exchange. Individual investors and brokers are the most common parties involved in transactions.

            There are five features in Islamic capital market such as business activity, use of proceeds, market exposure, structure type and asset requirement. Business activities conducted in the equity market must follow the shariah compliant business activity that has been set by the Securities Commission Malaysia. Only business activities that meet the syariah requirements can be continued and approved. It differences with conventional capital market which is there is no limited in the business activities. This means that the company is independent in conducting business activities without any conditions that need to be complied with. For debt market, example of product is sukuk and the sukuk issuer must participate in Shariah-compliant commercial activities that are permitted by the Islamic law. Sukuk must follow Shariah laws and principles in terms of structuring, underlying assets backing the issuance, investment of sukuk proceeds, trading, and rescheduling/restructuring. Unlike conventional market, the business activities of a traditional bond issuer are not restricted.

            Secondly, use of proceeds. For both markets, it must follow the Shariah compliant in conducting the business activities. The practise of locating and selecting companies that satisfy specified criteria from the stock exchange universe is known as stock screening. If the screening is related to the company's level of responsibility toward social and environmental needs or the quality of fiduciary stewardship on behalf of the company's stakeholders, the focus of the screening procedure might be financial performance in the case of index building or ESG (Environmental, Social, and Governance) performance. Transactions in the Islamic Capital Market, unlike the conventional market, are conducted solely in ways that do not violate Shariah law. To identify and list Shariah-investable companies, a specialised stock screening procedure must be developed. Shariah stock screening is the term for this procedure.

            Thirdly, market exposure. The amount an investor can lose due to risks specific to a certain investment or asset class is known as market exposure. It's a tool for assessing and balancing risk in a portfolio of investments. The risk associated with a given securities, industry, sector, or investment area increases as market exposure increases. The allocation of assets in a given investment portfolio is determined by risk exposure. Investors can reduce risk by separating investment types in this manner. However, equity market and debt market, both sets of investors will benefit from a bigger market base. For conventional capital market, Islamic investors find this unacceptable.

            Next, structure type that been used in debt market. The underlying assets' character, taxation and regulatory considerations, the desired investor base, and the views of the Shari'ah scholars who must authorise the sukuk issue will all influence the structure type chosen. Ijara, murabaha, and mudaraba-wakala are the most regularly used sukuk structures in the present market as a result of the AAOIFI Statement. For Islamic capital market, it will include asset, investment and debt-based while for conventional capital market, it’s debt-based only.

            Lastly, there are two asset that require in Islamic debt market which is asset-based sukuk and asset-backed sukuk. Asset-based sukuk means that the principal is covered by the asset's capital value, but the returns and repayments to sukuk holders are not financed directly by the asset. However, asset-backed sukuk means that the principal is covered by the asset's capital value, but the returns and repayments to sukuk holders are funded directly by the asset. Other than that, for conventional capital market, the asset is not required unless for asset-backed securities only.

        HUJ