Islamic investment

CHAPTER 1

Define Investment

An asset or goods purchased with the hope that it will be generate income in the future.

Concept of islamic investment

1. Gharar – Uncertainty not allowed in Islamic Finance often speculation , gambling and convential financial derivatives are seen as this.
2. Maysir - Gambling not allowed in Islamic Finance often speculation , gambling and convential financial derivatives are seen as this.
3. Riba - Interest : strictly prohibited , the return of money on money itself.
4. Amanah /Trust – trust worthless, faithfulness and honestly, also in relation to keeping another party’s assets in trust. It can also include safe custody, deposit taking and safekeeping.
5. Mudharabah -An investment partnership , investor (The Rabul Bul Mal) entrepreneur ( the Mudarib ). Profits are shared as per the agreement , but any losses of investment are onlt for the management investment.
6. Mudarib - Entrepeneur or investment manager in a mudharabah aggrement.
7. Musyarakah - A partnership with preagreed and loss sharing.
8. Ijarah - Islamic lease agreement.

Concept of investment according to Islamic perspective

1. The prohibition on riba , gharar and maysir. Riba , gharar and maysir is prohibited because it is in the form of long term abuse of behavior between two groups of human oppression.Financial assets held in trust and must be controlled to bring peace and prosperity in the world and in the hereafter.
2. Risk sharing / loss sharing / profit sharing. Mudharabah is a contract with a party in which it provides 100% of the capital and manage the investment project with the aim of generating profits.
3. Time value of money islamic interpreted. The main objectives is to examine the rational for the concept of time value of money and how it works. Islam does not allow people to profit from using the currency that they have received before receiving the counter value.
4. Prohibition of speculation. The islamic financial system discourages hoarding and prohibits transactiaon fearturing extreme uncertainty and gambling with risk.
5. Sancity of contract. Islam upholds the law aims to reduce the risk of contracting.
6. Shariah approved activities. Business activity not only against the rules of shariah quality for investment ineligible example alcohol, business,casinos and gambling.

Regulatory bodies in investment activities

1. BNM ( Bank Negara Malaysia )

• Safeguards financial stability and ensure an efficient monetary effect.
• Ensuring financial institutions are managed systematically.
• Promote a competitive financial system in order to provide efficient services.
• Assure public confidence
• Protecting the interest of depositors and customers.
• Prevent systemathic risk and failure.
• To promote the practice a good market.

1. SC ( Security Commision)

• Responsible for overseeing and monitoring all activities if market institutions.
• Is responsible for developing and introducing the future security.
• Developing the fund management and comprehensive facilities in he future.
• Produce innovation in sukuk and islamic equity related.
• The development of capital markets regulated by SAC.

SECURITY TRANSACTION PROCEDURES AS STATED IN PART IX INDUSTRIAL SECURITY ACT.

1. False trading and market ringging transactions
2. make a transaction which is misleading.
3. Manipulated the market.
4. One of the weaknesses in the use of market mechanisms.
5. Dissemanation of information about the external transaction.
6. To generate a good income.
7. False trading and market rigging transactions. A trade that is not accurate transaction.
8. To encourage people to engage in securities fraud. Deliberate deception made for personal.

CHAPTER 2

RETURN ON INVESTMENT (ROI)

• A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

HOW TO CALCULATE RETURN ON IVESTMENT

Example :

• What is the ROI for a marketing program expected to cost RM500,000 and deliver an additional RM700,000 in profits over the next five years?

ROI = Gains - Cost of Investment *100

Cost of Investment

ROI = RM700,000 – RM500,000 *100

RM500,000

ROI = 40%

RETURN ON EQUITY (ROE)

• Return on equity or return on capital is the ratio of net income of a business during a year to its stockholders equity during that year. It is a measure of profitability of stockholders investments. It shows net income as percentage of shareholder equity.

HOW TO CALCULATE RETURN ON IVESTMENT

Example :

• Company A earned net income of RM1,722,000 during the year ending march 31, 2011. The shareholders' equity on April 30, 2010 and March 31, 2011 was RM14,587,000 and RM16,332,000 respectively. Calculate its return on equity for the year ending March 31, 2011.

Average Shareholders' Equity = ( 14,587,000 +16,332,000 ) / 2

= 15,459,500

Return On Equity = Net Income

Shareholders Equity

= RM1,722,000

RM15,459,500

= 0.11 / 11%#

CHAPTER 3

Investment Analysis

Definition

Definition : defined as the process of evaluating an investment for profitability and risk, ultimately has the purpose of measuring how the given investment is a good fit for a portfolio.

Investment Analysis Method

1. Fundamental Analysis

The study of the stock value using basic data such as earnings, sales and others. This basic state any securities have intrinsic value. In equilibrium stock prices reflect the intrinsic value of the stock. An investor who has a good fundamental knowledge can make a profit from the difference between the market price and intrinsic value to move quickly before the market price aligned with the correct information.

1. Market/ economic Analysis

This analysis will examine the general economic, with emphasis on variables that affect the economy of a country in a given period. These variables can affect the aggregate economy and a significant impact on vested industry and company. Thus any developments that are likely to occur can affect the movement of share prices on the stock exchange.

1. Industry Analysis

This analysis is known as sector analysis because it examines the industrial sector in a certain period. In an analysis of industry needs to know the life cycle of industry analysis. The analysis must identify the period in which the company is located.

1. Pioneer stage (innovation)

At this stage of rapid growth in demand occur, especially among the nature inovatif. With the sales levels continue to increase with high growth rates. At this time there are also interesting opportunities outside the company to compete. Weak companies will be excluded at the outset. However, analysis are still having problems to identify companies that are able to survive in the industry.

1. . The development stage

At this stage is a high level of sales growth rate this time moderate. The industry improve product quality and try to reduce prices. More stable market conditions and strong seta can attract more investors into the industry.

1. Level Stability / Maturity Stage

This stage show is still high level of sales but a lower growth rate. All products and less innovative over standard among manufacturers. At this time there are many competitors in the market and cost are stable or nearly the same.

1. Stage Fall

At this stage most of the companies suffered a decline in sales levels that cause the company's revenue also fell and may result in losses. Most companies out of the market. However, companies are still in the market are companies with loyal customers.

1. Company Analysis

Detailed analysis of the company made with the internal and external aspects. To study the structure of the internal aspects of the organization of a particular company board of directors, key areas of business, subsidiaries, associated companies and business records. Final objective of the analysis is to find the intrinsic value of the company. This intrinsic value is compared with the value of the stock market as a basis for making investment decisions.

Intrinsic value of the information derived from the financial statements of the company that provides financial data of the company. Balance Sheet shows the position of the assets and liabilities of the company. Statement of income to evaluate the performance of management and to estimate the future profitability of the company.

1. Technical Analysis

Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

1. Dow theory

Dow Theory was created by Charles H. Dow in 1921.

It concluded that the stock price in the market as a whole does not move at random but influenced by three cycles and price movements, namely: -

1. Primary Movement

Cyclical price movements for a few years, that early - first year and at least three years. It involves long periods of time. Usually the development of the rise is longer than the development of the decline. Upward movement show the market 'bull' and downward movement show the market 'bear‘.

1. Secondary Movement

Cyclic secondary movement for several months, that as early - first six weeks and at the latest of six months. It acts as a force to improve the deviation occurs in the primary cycle. It appears because of the correction in the primary cycle of falling prices due to current market prices lifted or when the market plunged.

1. Small Movement/ Daily

Daily movement is occurring randomly. It is cyclic for a few hours to a few days. Cycle effect is not as felt by investors as relatively short duration and of no importance to the technical members in making predictions.

1. Technical Indication.

1. The Advance Decline Line.

Fluctuation line is the net difference between the number of stocks experiencing price increases with the number of shares of the price decline by subtracting the number of shares up to the number of shares to come down in price. These calculations are made ​​using cumulative data. The results obtained are plotted in order to form the line on a daily or weekly basis. These lines are compared with the average line to indicate whether the stock market indicator movement is also experienced by the market.

1. Moving Average

Moving Average is calculated by determining the number of such average closing price for 200 days, 30 weeks and so on. The new calculation is made by adding one day and the first to drop one day to the next. This calculation is made over and over and the figures are plotted to form the moving average line. Moving average price compared to the market to decide whether buying or selling.

1. The New High Price Low

These market indicators could reflect either bullish or bearish market.Market is considered bullish if there is a number of shares of a new show the highest price significantly over 52 weeks. Instead the market is weak if there are only a few stocks only the highest price of a new show.

1. Transaction volume

These market indicators also reflect bullish or bearish market. High transaction volume as a whole shows the market is bullish. This condition is stronger if followed by an increase in price.

1. . Mutual Fund Liquidity

Market conditions have a direct relationship with this liquidity ratio. The higher the liquidity ratio of the market is bullish. High liquidity ratio shows potential purchasing power and its stock price will rise. On the other hand if the liquidity ratio is low potential purchasing power also lower and its market will be fall.

1. Others Technical Indication

Contrary Opinionand Short Interest Ratio.

• Bar chart

Prepared by plotting a bar chart of daily share prices over time. Every day stock price movements drawn vertically, the upper part shows the highest price, the bottom shows the lowest price, while a horizontal line marked showing the closing price. The underside of the bar chart shows the daily sales volume. Technical members to use a bar chart to see patterns and charts are used to forecast future price movements.

• Point and Figure Charts

The chart is prepared by plotting stock prices suffered a significant price change. Transaction volume is not shown in the chart. Horizontal line shows the time but according to calendar time is not important. The symbol 'X' and 'O' is used in the above chart. 'X' indicates an upward price movement. Signs 'O' show downward price movement. All the 'X' or 'O' represents the value of Rs 1, Rs 2, Rs 5 and so on depending on the value of the stock price changes. The 'X' and 'O' only recorded when a certain amount of price movement

• Relative Strength Index

Relative strength index is the ratio of stock prices to a market or industry index or ratio compared to the average share price of the stock price. This ratio is plotted over time. This line shows the strength of the stock relative to the foundation selected as industry, market and so on.

Efficient Market Hypothesis

Efficient market hypothesis is the market in which security prices fully described all known information quickly and accurately. It is key to the determination of share prices in the market.

Conditions

There are many investors who are rational and seek to maximize profits and is actively involved in the market. Information can be easily obtained without any restrictions or conditions that make it difficult for a person to get information.

Information can be obtained at random where the announcement was made independently. This means that all announcements made by the company should be done when necessary, without any connection with the announcement made by other companies. Investors respond quickly and fully to new information in the market and cause the stock price quickly adjusted in line with the new information.

Types

• Past information

This is information that is relevant to the valuation of shares by analyzing past market price data.

• Public information

This is information about a company, the industry and the world economy can be obtained through a public announcement.

• Internal information

This information is only held by a few individuals who have a position in a company.

Chepter 4 (SUKUK)

ISLAMIC BOND CONCEPTS OF SUKUK

• Sukuk comes from Arabic word Sakk mean legal instrument. check, or deed.
• Sukuk is a Islamic Investment Certificates.
• Sukuk typically represent "ownership of tangible assets, usufructs and services”.
• Financial instruments that are structured to avoid the payment of interest, which is forbidden under strict Islamic principle, while serving much the same purpose as interest-paying debt
• Sukuk means certificates with identical nominal value that after completiont at after completion of subscription operations evidence payment of a nominal amount mentioned in it by the purchaser to the issuer and its holder will be the owner of a set of assets or profits arising from the assets or beneficiary of a project or a special investment activity ,SOURCE BY AAOIFI

OBJECTIVES:

The Sukuk and Bonds Market is a market where participants (investors & issuers) are able to trade investment securities that have a periodic returns and lower risk than equity investment. Sukuk and Bonds are considered important channel for governments, companies, and institutions to provide the necessary liquidity to finance its projects at relatively low cost.

In addition, the Sukuk and Bonds market will enable investors to diversify their investments and provide financial protection for their portfolios with lower risk tools which ensure a safe and periodic return for the investor.

THE CHARACTERISTICS OF SUKUK

• Investment sukuk are documents issued, in equal value, either in the name of the owner or of the bearer to establish the right of the certificate owner or rights and obligations such certificate is representing.
• Investment sukuk represent a common share of ownership of assets available for investments, whether they are non-monetary assets, usufructs, a mixture of tangible assets and usufructs and monetary assets, such as receivables and cash. These sukuk do not represent a debt owed to the issuer by the certificate holder.
• Investment sukuk are issued on the basis of a Shari’a-compliant contract in which case the issue of trading of these sukuk are governed by the rules of respective contract.
• The trading of investment sukuk is subject to the terms that govern trading of the rights they represent.
• The owners of these certificates share the return as stated in the subscription prospectus and bear the losses, each according to his respective share of ownership.

TYPE OF SUKUK

• Ijarah

Sukuk issued based on the agreement or contract ijarah, where a party acting in person or through his representative rights, benefits and rent on an asset to another party based on the price and the agreed period, without transfer of ownership of assets followed by itself.

• Musharakah

Two or more parties combine working capital to develop new projects, expansion of existing projects, or finance the business. Gains or losses arising borne along with the amount of capital participation of each side.

• Musharakah Mutanaqisah

Subordinated Mutanaqisah there are two parts, first bank and the buyer will be a partner in the ownership of a house and bank owned the largest share, while the customer is the minority owner.

• Mudharabah

Sukuk issued, in which one party provides capital (rab- maal/shahibul maal) and other energy menydiakan and membership (mudharib), gains from cooperation will be divided based on the proportion of comparison(ratio) previously agreed. Losses arising will be borne by the providers of capital, over the losses there is no element of moral hazard (with an ulterior motive of mudharib)

• Istisna’

Where the parties the sale in order to finance a project or article. As for price, delivery time and specification of project / goods is determined in advance based on an agreement.

• Wakalah

A contract, authorizing a person to nominate another person to act on his behalf while he is alive based on the agreed terms and conditions.

• Bai salam

Future financing transactions, in which the financial institution to pay upfront for the purchase of certain assets, which the vendor will supply an agreed date. Normally, lenders receive a discount for advance payment (calculated by reference to a benchmark such as LIBOR), plus the margin.

• Murabahah

Murabahah is a form of sales where the cost of goods sold and the profit on sales is known to both parties. Purchase price and sales and profit margins should be clearly stated in the sale agreement. Payment of Murabahah price may be in place, in installments or a lump sum after a period of time.

• Bai Bithaman Ajil

A contract that refers to the sale and purchase transactions in assets and deferred installments for a period as agreed sales. Price including profit Margins.

RISK UNDERLYING SUKUK STRUCTURES

A ) MARKET RISKS

Defined as the risk falling on the instruments traded in the market. Two categories of market risks are exemplified: the first is the general (systematic) and the second is the specific (unsystematic). Systematic or general risks result from the shifts in the governmental and economic policy.

1. Interest Rate Risk (IRR)

As far as Sukuk is concerned, this can be considered as a rate of return risk. Repeatedly speaking, Sukuk based on fixed rates are exposed to the same risk as fixed rate bonds. “The rise in market (interest) rates leads to the fall in the fixed-income Sukuk values. For example, on January 1, 2009, an investor buys a 2 year Sukuk at 10% annual return rate. On January, 2, the market rates increase to, say, 15%. Although the market rates have changed, the Sukuk holder will still get the 10% coupon payments. Hence his asset now earns less than the 15% market rates”.

1. Foreign Exchange Rate Risk

Currency risk arises from unfavorable fluctuations of exchange rate that affects gravely on the foreign exchange positions. In in case of arising from a disagreement between the unit of currency in which the assets in the Sukuk pool are designated, and the currency of designation in which the Sukuk funds are accumulated, the Sukuk investors are exposed to an exchange risk.

B) CREDIT AND COUNTERPARTY RISK

• Credit risk of default in settlements. If the relationship involves a contracting or written arrangemerisk can be stated in the probability that the counterpart refuses to comply nt, the counterparty with the conditions of the contract. The consequences can be represented in the decline of the value of a bank’s assets
• Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised.Such an event is called a default. Other terms for credit risk are default risk and counterparty risk.
• Credit risk can be classified in the following way:

1. Credit Default Risk - The risk of loss when the bank considers that the obligor is unlikely to pay its credit obligations in full or the obligor is more than 90 days past due on any material credit obligation default risk may impact all credit-sensitive transactions, including loans, securities and derivatives.
2. Concentration Risk - The risk associated with any single exposure or group of exposures with the potential to produce large enough losses to threaten a bank's core operations. It may arise in the form of single name concentration or industry concentration.
3. Country Risk - The risk of loss arising when a sovereign state freezes foreign currency payments (transfer/conversion risk) or when it defaults on its obligations (sovereign risk).

C) SHARIAH COMPLIANCE RISK

• Shari’ah compliance risk refers to the loss of asset value as a result of the issuers’ breach of its fiduciary responsibilities with respect to compliance with Shari’ah. There could be several cases of willful or innocent breaches. The dissolution clauses of the Sukuk define events that will make the Sukuk deed null and void due to Shari’ah non-compliance. For example, if the Sukuk is based on a hybrid of Ijara and Istisna’ assets, Ijara must always be more than Istisna’ in the pool, otherwise the Sukuk deeds will dissolve”.

D) OPERATIONAL RISK AND INSTITUTIONAL RIGIDITY

1. Default Risk: This occurs when each document has conditions for the termination of the certificate in case of a default by the obligor.
2. Coupon Payment Risk: This occurs when the obligor may fail to pay the required coupons on time.
3. Asset Redemption Risk: This happens “when the originator has to buy back the underlying assets from the certificate holder. The principal amount paid may not be equal to the Sukuk issue amount and, as a result, there is the risk that the assets may not be fully redeemed”

PROCEDURE AND ADVANTAGE FOR ISSUANCE OF SUKUK

SUKUK INSSUANCE PROCEDURE

• Appoint Principal Advisers and Shariah Advisers, as well as other experts, which may be required for the necessary due diligent exercises expected for such proposals.
• Principal Advisers need to seek approval from the Controller of Foreign Exchange.
• Principal Adviser needs to obtain indicative rating from rating agency recognised by the SC.
• Principal dealer will submit the complete proposal for approval to the SC.

ADVANTAGES

1. Sukuk represents a beneficial ownership interest in the underlying asset. Returns on sukuk are tied to the returns earned through the underlying assets
2. The financing must be channeled for productive purposes such as project financing, rather than for speculative activities under the risk-sharing principle required, there is an explicit sharing of risk by the financier and the borrower. This arrangement will entail the appropriate due diligence and the integration of the risks associated with the real investment activity into the financial transaction. The real activity is expected to generate sufficient wealth to compensate for the risks.
3. In addition, transparency represents a basic tenet underlying all Islamic financial transactions. The profit-sharing feature of Islamic financial transactions imposes a high level of disclosure in the financial contract. The accountabilities of the respective parties involved in the transaction are clearly defined in the contract.

Chapter 5 (FINANCIAL INSTRUMENTS)

TYPES OF FINANCIAL INSTRUMENTS IN INVESTMENT ACTIVITIES

1. SAVING ACCOUNT

• Safe to store your emergency funds
• Provide easy access to your money

1. CERTIFICATE OF DEPOSIT

• Offers a higher rate of interest
• When you purchase a CD, you invest a fixed sum of money for fixed period of time.
• The longer the period, higher is the interest rate.
• There are penalties for early withdrawal.

1. STOCK

• Own a part of the company’s assets.
• Company does well, you may receive periodic dividends or be able to sell your stock at a profit.
• Company does poorly, the stock price may fall and you could lose some or all of the money you invested.

1. BOND

• Certificate of debt issued by the government/company with a promise to pay a specified sum of money at a future date and carries interest at a fixed rate.
• Bonds are tradable instruments & are generally considered safer than stocks - bondholders are paid before stockholders when bankrupt.

1. MUTUAL FUNDS

• Professionally managed pool of money from a group of investors.
• A mutual fund manager invests your funds in securities, including stocks and bonds, money market instruments, based upon the fund’s investment objectives.
• You can diversify & sharply reducing your risk.

1. MONEY MARKET DEPOSIT FUND

• Generally earn higher interest than savings accounts.
• Very safe & provide easy access to your money.
• Insured by the FDIC (Federal Deposit Insurance Corporation).

1. ANNUITIES

• Contracts sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement.
• Relatively safe, low-yielding investments.

EQUITY MARKET FUNDS

Market where securities, shares and other exchange traded instruments are bought and sold. Once the shares or securities are bought, the shareholders have the freedom to sell the securities. Allows the owner of capital to invest in accordance to their preferences in terms of extent of risk involvement, rate of return and period of investment.

1. Islamic Equity Funds

• Definition:

Islamic equity funds (IEFs) are similar to traditional equity funds in that investors pool their funds to invest in shares. However, the main difference between IEFs and standard equity funds is that investors in IEFs earn halal profits in strict conformity with the precepts of Islamic shariah.

Returns are achieved largely through the capital gains earned by purchasing shares and selling them when their price increases.

• Concept:

The investors in IEF’s earn halal profit in strict conformity with the precepts of Islamic shariah.

• Principles of Islamic Equity Investment:

1. The investment must comply with shariah principles that govern Islamic investment fund and that prohibit investment in companies whose primary business in not consistent with shariah principles
2. Stock that do not meet specified financial parameter are excluded.
3. The fund manager conducts a purification process on the impermissible income generated. The impure income is distributed to charity

Diference between Equity Investment, Musharakah and Mudarabah:

Equity Investment

Musharakah

Mudarabah

Islamic Financial Instution

Partnership

Profit Sharing

Can be disposed

Musharakah shares profit and loss

Mudarabah does not shares the loses

• Advantages Of Fund Management For Islamic Equity Investment:

1. Compliance shariah
2. Halal
3. Places that authorized for investment
4. Profit not determined

1. Real Estate Investment Trust ( REIT )

• Introduction ( REIT ):

1. REIT’s are collective investment schemes that invest in a portfolio of income generating real estate assets such as shopping malls, offices, hotels or serviced apartments.
2. Offering shares to the public
3. Established with a view to generating income for unit holders.
4. Investment instruments where the process to invest is minimum 50% from the total asset of property.

• Objective ( REIT ):

1. Cash flow

• Structured deposit which generates positive cash flow (low deposit)

1. Leverage

- Amount of loan combined with our money.

- Own money can be invested

1. Acknowledgement

• High return of Equity

1. Tax benefit

- No tax charged in REIT’s

- Hence, no reason to increase investment by tax.

• REIT’s player:

• Unit Holder
• Trustee
• Management Company
• Property
• Property Manager

• Development Of Conventional REIT’s in Malaysia

• Regulatory framework is listed in the unit trust and the establishment approved by BNM
• Security Commission issued guidelines on trustee fund property
• To decrease the cost of establishing REIT’s, government allowed allow tax deductions for expenses, monitoring and legislation

• DEVELOPMENT OF ISLAMIC REIT’S

• Shariah Committee issue guidelines for REIT'S in November 2005 to facilitate the creation of assets for investors.
• REITS guidelines can be considered as an additional conventional guidelines.
• Islamic REITS is the first in the world.
• AL AQAR KPJ REITS it was launched by KPJ Health Care Malaysia May 2006.
• Islamic products other than sukuk

• CONVENTIONAL VS ISLAMIC REIT’S

ITEM

CONVENTIONAL REITS

ISLAMIC REITS

Issuance process

approved by the securities commissions

approved by the shariah comitee

investor

only conventional investors

Both can invest

Property tenants

tenant can be doing any activities

tenants are not allowed to conduct any activity that does not conform to shariah

• Advantages of investing in REITs

• Stable and regular return
• Low income tax
• Easily possession-can easily buy or sell in short period
• Require small capital

• Risks of investing in REITs

• Return or profit is not guaranteed
• Investors has no control in the investment decision
• Depend on market fluctuations, economic factors and changes in interest rates.

1. Islamic unit trust

• A Shariah-based unit trust fund is a collective investment fund that offers investors the opportunity to invest in a diversified portfolio of Shariah-compliant shares and fixed-income securities as well as other Shariah-compliant money market instruments.

• Advantages in investing in unit trust:

• Can reduce investment risks
• It does not cost that much to invest in unit trust
• No element of riba’, gharar dan maisir

1. Islamic Hedge Fund

• One step strategy for reducing the risk of certain investors through certain financial instruments.
• Reduce the risk of loss on an investment or depreciation in the value of an asset.
• It is important because if there is a loss in a market will be covered by the profits earned in other markets.

• Role of players:

• Provides a selection of Shariah.
• To confirm the monitoring Shariah.
• To advise the board of Shariah in business operations.
• Assist the parties in related with an investment Shariah.

• Shariah compliant hedge fund:

• All types of business funding base should stick to the basics of Shariah Compliant.
• Funds can not be dealt with in equity issued by companies that do not comply with Shariah.
• Example: Insurance, alcohol, gambling and others.

1. Asset Backed Securities

• Asset-backed securities, are bonds or notes backed by financial assets.
• A process known as “securitization”.
• The type of loans that are typically securitized are credit card receivables, car loans, home equity loans, and student loan.

• Ijarah Thumma Al Bai’

• Al Ijarah Thumma Al Bai’ is a type of lease contract,
• Contract rental agreement where the owner will transfer the leased asset to the lessee at the end of an agreed period.

• Bai’ Bithaman Ajil

• An agreement involving sale and purchase transaction for the financing of an asses on deferred payment.
• Basis with a pre-agreed payment period.
• A profit margin is included in the sale price.

OTHER TYPES OF INVESTMENT INSTRUMENTS

1. Islamic Interbank Money Market (IIMM)

• Islamic Money Market refers to a market in which these activities are carried out Sharia compliant
• IIMM as a vehicle to provide a source of short-term investments based on Shariah principles on Islamic banking sector.
• Only Islamic banks, commercial banks, merchant banks and finance companies that qualify and the discount allowed to take part in this IIMM.

• Features:

• Funding and adjust the portfolio in the short term
• Serve as a channel for the transmission of monetary policy.
• Manage supply and demand to put the bank in a safe and avoid liquidity problems.

1. Warrant

• Warrant is an option that is usually offered by an institution and which may subsequently be listed and traded on an exchange.
• Warrant is the right (but not the obligation) to purchase shares of a company at the date of exercise.

There are two types of warrants:

• Call warrants.

• Call warrant gives the right, but not the obligation, to buy a fixed quantity of an asset (such as shares) with a specific price within a limited time.

• Sale warrants.

• Gives the right, but not the obligation, to sell an asset by a certain price within a limited time.

1. Priority Share/Preference Share

• Shares that combines some features of Ordinary Shares and some characteristics of bonds.

• Features:

• Priority claim on dividend distribution.
• Preference share dividend will be paid before the payment of dividends to ordinary shareholders.
• Preference shareholders are not the owners of the Company and shall not be entitled to vote or intervene in management and administration.

1. Forward Contract

• Private agreement between two parties giving the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time
• Settlement occurs at the end of a forward contract.

1. Futures Contract

• Agreement between the two parties, the seller and buyer, to surrender an asset in the future.
• Futures contracts traded on the exchange (Bursa Derivatives Malaysia)
• Contract clearly set the amount and quality of the goods to be purchased or sold, at a predetermined price at a future date that has been set
• Can be sold on the secondary market (secondary market) before the expiry date (Expiration Date).

1. Option

• Contract between two parties.
  1. Seller
  2. Buyer

• Buyers are not obligated to complete the transaction in the event of a change in the transaction.
• It can be in the form of shares, stock indices, commodities, debt instruments or futures contracts.

CHAPTER 6

Concept of investment in share according to islamic perspective

Asset or goods purchase with the hope that it generates income in the future. Economy: the purchase of goods that was unable to be used on this day but used in the future to get wealth. Finance: asset finance purchases of goods that are not used to day still used in the future and will be sold at a higher price.

CHARACTERISTICS OF COMMON SHARE

1. Limited Liability

Investors cannot lose 100% more than their investment, no matter how much losses incurred by the company.

1. Voting Privileges

Shareholders have the right to vote at annual meeting with each share in entitling them to a vote.They will also receive the audited financial statement of the company.

1. Priority of Claim in Bankruptcy

If the company is experiencing bankruptcy the first thing deducted is the payment of dividends to shareholder. All of the debtor company, bondholders and managers will receive their dividends before common shareholders receive dividends.

1. Dividend

Holders of ordinary shares are entitled to receive dividends payments if they are authorized by the board of the company. Dividends may be paid in cash. Common share: share capital of the company with public capital to make investment. Preferred share: stock is set and is non transfer able and limited ownership.

1. Preemptive Right

If a company offers new shares the holders of ordinary shares have a total right to buy additional shares of preparation of the smelting. Usually the stock is below the market price before the share offered to other potential investors.

1. Proportional Share in the Remaining

If the company is experiencing bankruptcy the first thing deducted is the payment of dividends to shareholders. All of the debtor company, bondholders and managers will receive their dividends before common shareholders receive dividends.

TERM IN SHARE TRADING

1. . Share Capital

Funds raised by issuing share in return for cash or other.Total share capital of the company may change according to the current market.

1. Share Market

A place where share of difference company are traded. Example: share fast food (KFC, pizza and MCD) are listed in one place, namely in the fast food industry.

1. Par Value

Value specified in securities. Stated value of share or par value.

1. Prospectus

Documents the describe the financial assurance to prospective shareholders.

1. Board Lot

A standard trading unit as described in UMIR (Universal Market Integrity Rules. Purpose to avoid odd lot and to facilitate trade.

1. Dividend

Part of the company profit’s are given back to the investors annually, quarterly.

DEMONSTRATE UNDERSTANDING ABOUT SHARE MARKET

1. Roles of Bursa Malaysia in share market.

Provide all information about stock. Recognise and subcribe to the global capital market contracts. Bursa MAS provide information to investors for them to compare the performance of the stock and manage their portfolio.

1. Factor Influence Share Price

1. Internal

Depending on the firm’s stock bonus, company dividend and stock.

1. External

Outside the firm such as raw materials, economic trends, inflation and investors confidence. Share repurchase-the company buys back shares to reduce the number of outstanding share. One share split to increase the number of shares in a public company, when the company declared stock splits, stock prices will fall. Rights issue that increased the supply company, may adversely affect the stock price. Power of supply and demand changes in the market affect the stock price every day. Stock price will drop on the ex-dividend date. New products or services introduced in the market. Open new markets with existing products.

1. Central Depository System (CDS)

System that is owned and operated by bursa mas dipository sdn bhd, a wholly-owned subsidiary bursa mas. Investors who want to trade with securities which are listed on bursa mas, need to open a CDS account an authorised agent depository.

1. MASDEQ

Launched 6/10/1997 as separate securities market. Targeted specific stock exchange and growth technology companies. Offers listing and funding opportunities for high potential companies that do not meet the requirements of the KLSE.(Kuala Lumpur Stock Exchange).

1. Bursa Suq As-Sila’

BBSA launched 17/08/2009 by BURSA MAS. BSAS get strong support from several parties such as the palm oil MAS. BSAS developed to facilitate financial transactions provide liquidity markets and structuring of products such as deposits, financing and investment.

DIVIDEND DISCOUNT MODEL

DDM is a method of valuation of the company based on the theory that ordinary share the amount of the discount must make payment of dividends in the future

(Used to evaluate stocks based on net worth during future dividends)

John Burn Williams P=DI / r-8

P= price share

G=sustainable growth rate

R=Fixed cost equity

Di=Value future dividend

PRICE EARNING RATIO = Market Price Per Equity / Earning Per Share

The Difference Value Of Intrinsic With The Value Market. Value intrinsic= is that worth based on assets and debts, the expected growth rate, and finally the amount of cash is expected to generate more of its life. Value Market= is what investors are willing to pay for a company. It is usually in the surveys by calculating its market capitalisation.

Value Intrinsic= stocks usually refers to the value of the company's intellectual property such as copyrights, trademarks or other intangible things such as business models, personal relationships and technology.

Value Market = for stocks depending on market conditions wider popular opinion and investors at any time. The market value of the company either could be higher or lower than the basic value and instinsic.

CHAPTER 7

SECURITIZATION.

Definition.

An guarantee which change the physical assets to financial assets . Example : The company has assets and sell assets to get cash for pay debts and not declared bankrupt for their company.

PARTIES INVOLVED

1. Originator

An entity making loans to borrowers or having receivable from customers..

2. The Issuer

As a middle man in securitization.

1. The Trustee

Is the holder of the mandate. It involves the bank/the bank as holder of the mandate.

1. Investor

A qualified investor. Investors in security for example bank and company.

1. Underwriter

Is the selling and set public and market securiti also.

1. Custodion

The Deputy guarding something assets. For example the bank of Commerce.

1. Service

Daily activities that occur in securitization.

1. Rating

The evaluation of the security.

ADVANTAGES

DISADVANTAGES

Asset as security in sukuk.

Each transaction participant exposed in the risk.

Investor will get a higher return.

Delays in the payment of dividends to investors.

The value of collateral assets determine the amount of funds will be given to the debtor.

This is a very inefficient way of earning on its liquidity.

Convensional securitization

Islamic securitization

Investors do not know the ownership of goods but the transaction still in progress

Investor know there must be a process in which ownership agreement and qabul

Allows all asset, including securities of illegal asset

Item related to riba,gharar, maisir, gambling will not be sold

Not involve in implementation of Islamic contract

The process involve the issuance of Islamic securities implementation of islamic contract such as sale,lease (ijarah) , profit sharing (mudharabah) or profit and loss sharing (musyarakah) order (istisna) booking (salam) and other.