The Islamic Capital Market is nowadays very prominent in the world of Malaysian finance. With a majority of the counters on Bursa Malaysia today being Shariah-compliant, people are increasingly becoming interested to find out more about these counters. If you are an investor who would like to know more about Islamic Capital Market products, specifically Shariah-compliant securities
Shariah-compliant securities are the securities of companies whose activities conform to the Shariah principles. In general, securities will be labeled as Shariah-compliant if they are not extensively involved in the following activities:
• Financial services based on riba (interest)
• Gambling
• Manufacturing of non-halal products (e.g. pork, liquor etc)
• Conventional insurance
• Entertainment
• Manufacture or sale of tobacco-based products or related products
• Stock broking or share trading in non-compliant securities
• Other activities deemed non-permissible
Apart from that, the level of contribution of interest income received by the company from conventional fixed deposits or other interest-bearing financial instruments is also taken into account when determining Shariah conformity.
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Figure 1.3 Difference between Conventional and Shariah-compliant investment
Difference between Conventional and Shariah-compliant investment
Shariah
Conventional
Good prudence
Regulatory compliance
Shariah compliance
Good prudence
Regulatory compliance
تظا٠ههذ السطور الى بداية الاختلا٠ÙÙŠ اول شي وبعدها الرسمة
Malaikah (2003) mentioned that Shariah-compliant investment means controlling and limiting exposure to certain activities that are 'Halaal' in other words allowed in Shariah. The derivation of (Halaal) activities can be summed-up as all activities not falling
into prohibited activities. The conventional investment are good prudence of activities that regulatory compliance.
Ethical Investing
Ethical Investing" or "Socially Responsible Investing" is a form of investing where you don't invest in companies that you find to be against your own personal morals. Classic "sin stocks" are tobacco, alcohol, casinos, military, and sometimes big oil and other polluters.
There has been a lot of debate about ethical investing over the years. Some people are inclined to invest only in companies that they like, while others invest in whatever companies they think will provide them with great returns regardless of what that company actually does. There are arguments for both sides. In this study there are two types of investing markets
5.1 Conventional ethical investing
Ethical investment as an investment alternative incorporates beliefs and values for financial gain (Sparkes, 1994). In explaining ethical investments, Domini and Kinder (1986) suggests that every stock or savings has an ethical dimension and investors need to apply their own standards when evaluating stock investment or the type of savings to invest in. Cowton (1994) argues that ethical investors are concerned not only with financial returns but also the character of the companies they invest in; their conduct, activities and the products and services they offer. Melton and Keenan (1994) prefer an economic approach to ethical investing proposing a 'socially responsive portfolio' that has no specific ethical dimension but where the portfolio is an aggregation of a number of ethical subsets. Hoggett and Nahan (2002) argue that since ethical funds determine their own 'ethical' standards, they are self-identified in theory but often not so in practice. They contend that providing investors the choice to simply 'avoid' certain activity does not deem funds to be ethical but rather constitutes).
Islamic ethical investing
In Islam on the other hand, the 'avoidance' (ethical) principles embrace shariah-based criteria whereby the desire to manage investment funds correspond with its beliefs in avoiding prohibited goods and services; dubious transactions; and speculative financial dealings bordering on gambling - at the fund and corporate levels (Securities Commission, 2006). Thus for instance, investment in companies dealing in interest (riba), alcohol, gambling, casinos, music, pornography and armaments are excluded from an Islamic investors' desired stock investment universe. Further, transactions involving excessive risk from highly speculative stock market dealings are proscribed. These and other ethical stance characterises Islamic equity funds as being faith-based since it "represents an assertion of religious law in the investment market where the market is free from prohibited activities" according to Bursa Malaysia (2011). according to Siddiqi (1976) and Usmani (1998) contends that this position emphasises the importance of ethical conduct in mua'malat (Islamic financial matters) - it is then left up to the conduct of the investor to manifest these in his/her financial dealings and decisions. When such requirements are fulfilled, then a well-defined Islamic investment portfolio will include a combination of shariah compliant stocks together with other assets (Siddiqui, 2004). Also, economic entities compliant with these criteria are then capable of offering investment alternatives for general public participation.
Screened Versus Non Screened Investments
In studying Islamic stock market in Malaysia, Ahmad and Ibrahim (2002) investigated the performance of KLSI (Islamically approved securities) with comparison to KLCI (conventional) from the period of 1999 to 2002. They used various methodologies to investigate the performance measured by risk and return of both indices. Techniques used were adjusted Sharpe ratio, Treynor Index, adjusted Jensen alpha and t-test for comparing means. They divided the sample into three periods; overall period, growing period from April 1999 to February 2000 and decline period from March 2000 to January 2002. In comparing raw returns and risk for all periods, it was concluded that for the overall and declining periods the return was lower for KLSI while for the growing period KLSI had slightly outperformed the market. For risk, KLCI was more risky for all the periods. When comparing the means using t-test the results were statistically not significant for all the periods. In addition, using different measures such as risk adjusted return KLSI appeared to be higher than KLCI only in the growing periods. They argued that the underperformance of the KLSI might be because the market was dominated by non-Muslims as well as the
less existence of Muslim investors in Syariah approved securities. Moreover, it can be said that the shortness of the period is one of the reasons for such results.
