ISLAMIC EQUITY MARKET

By
Zairulnizad Shahrim
23rd March 2015

Shariah Principle in Equity market

Direct shareholding is the main from of participation in the equity

market
The share certificate signifies a form of capital contribution in a

company/partnership
This contribution is in the form of musharakah or mudharabah
The shares can be sold at any price as it represents the assets owned
by the company

Shariah Principle in Equity market

(cont)
The profit for the investors can be in the form of capital gain,
dividend or both
Investment in Ordinary Share is a direct contribution to and ownership
of the business and as such, is acceptable subjected:
The investments must be in business acceptable to Shariah the
needs for stock screening process
There should not be guaranteed fixed return tied to the
investments
Shareholding is the main underlying investment activity

Malaysian ICM offers wide range of Shariah

compliant investment products & services
Islamic Bond Market
Islamic Equity Market

Islamic fixed income securities

Shariah compliant stocks

Sukuk ijarah, musharakah & mudharabah

Islamic equity funds

Islamic asset-backed securities

Islamic REITs

Islamic bond funds

Islamic index

Shariah compliant derivatives

Crude Palm Oil Futures
Crude Palm Kernel Futures
Single Stock Futures

Islamic stockbroking

Islamic structured products

Shariah-compliant trading

Dual currency structured investment

Shariah compliant margin financing

Equity linked structured investment

Equities Screening for

Shariah Compliance
Screening is important to identify companies whose activities are
compliant to Shariah

Ownership leads to control and management issues. Investors are

deemed to be the owners and therefore are responsible for the
conduct of the company

Equities Screening for

Shariah Compliance (cont)
Islamic investors (either through direct investors or through
intermediary or vehicle) are religiously accountable for the
conduct of the company

To ensure whether a company is Islamically acceptable for

investment, a proper Shariah screening procedure must be

adopted to determine acceptability of a particular company, in
its compliance to Shariah in term of the conducts of the

company

Islamic equity investment starts

with Shariah-compliant securities
Securities (ordinary shares / equities) of a company listed
on Bursa Malaysia which is classified as Shariah permissible
for investment
Primary business and investment activities that generate
income for the company conform with Shariah principles
In Malaysia, the body that gives Shariah endorsement is the

Shariah Advisory Council (SAC) of the Securities Commission

(SC)

Shariah-compliant securities
broaden investment opportunities
Participation by Muslim investors was minimal in 1970s
Insufficient guidance on securities that can be traded (Shariah)
Listed companies involve in various business activities (halal &

haram)
The scenario had limited the participation of Muslims in economic
activities

Lost of opportunity (in the early 1990s) in terms of capital gain

while there was a significant increase in the number of companies
listed on the stock exchange

Islamic equity investment in

the early years

Mid-1960s, Lembaga Tabung Haji started to explore the

possibility to invest its funds in Shariah-approved investment

Prior to1997, Bank Islam Malaysia Bhd initiated the review to

determine the Shariah status of listed securities [but for internal

use only]

1996-1997, the Shariah Advisory Council (SAC) of SC developed

Shariah screening criterias to facilitate compliance review
process

June 1997, SC introduced the official list of Shariah-compliant

securities listed on Bursa Malaysia

Shariah compliance review is

performed at national level

SC has a regulatory power to obtain relevant information and

other business information from listed companies which are not
publicly available

Enables

SC

to

issue

appropriate

guidelines

on

Shariah

compliance e.g guidelines on disposal of non-compliant

securities

Facilitates efforts to promote centralisation and harmonisation

of Shariah decisions on the status of listed securities

Enhances market confidence as the securities are endorsed by a

Shariah body at national level

The Shariah Advisory Council (SAC)

Established in 1996 under the Securities Commission Act (SCA)

Shariah scholars have a profound influence on the day-to-day practice

of finance

Purpose is to give pronouncement on product compliance

Collaboration between Shariah boards and financial professionals lead

to greater product innovation

Advises on Shariah compliance with regard to new products and

structures

Screens listed securities for Shariah compliance

SACs approach in screening listed

securities
Based on Shariah criteria sourced from Quran, Hadith,
Qiyas, Ijma and general Shariah principles

Determine income contribution from Shariah prohibited

activities of listed companies using Shariah methodology and
criteria set out by the SAC

Classify

the

securities

as

Shariah-compliant

if

income

contribution from the prohibited activities is within Shariah

tolerable level

Specific processes are performed

SC as secretariat to the SAC:
Extract relevant information from audited financial statement of
public listed companies
Undertaking Shariah compliance review process to identify
contribution from prohibited activities
Compare with Shariah financial benchmark set by SAC

The process continues

List of Shariah-compliant Securities

SC compiles the result and issues the list of Shariah-compliant
securities
Announcement in May and November every year
SAC is the final decision maker

Final decision based on quantitative method (financial

benchmark) and/or qualitative consideration

Based on Shariah compliance

review criteria
Classified
as
Shariah-compliant
if
companys
involvement in the
following activities
is minimal :

1.

Financial services based on riba (interest)

2.

Gambling

3.

Manufacturing or sale of non-halal products

4.

Conventional insurance

5.

Entertainment

6.

Manufacture or sale of
products or related products

7.

Stockbroking or share
compliant securities

8.

Other activities deemed non-permissible

tobacco-based

trading

in

non-

1.

Interest income from conventional fixed deposits /

interest bearing instruments

2.

Dividend income from investment in non-approved

securities

Shariah compliance review process

2 Phases
Compliance
review process

Quantitative

Qualitative

Calculate the contribution from

non-Shariah activities and
compare with Turnover and PBT
of the Group
SC

SAC

Compare contribution from non-Shariah

activities to Groups TO and PBT
Listed company

Subsidiaries

Subsidiaries

Associate
companies

Other investment

Phase 1: Quantitative analysis

Step 1: Information gathering
1. Groups Turn Over (TO)
2. Groups Profit Before Tax (PBT)
3. TO and PBT of Non-Shariah activities
4. Share of Profit (SOP) for Non-Shariah activities
5. Interest Income
6. Dividend from Non-Shariah investment

Phase 1: Quantitative analysis

Step 2: Calculate the contribution
1. TO and PBT of Non-Shariah activities vs Groups To
and PBT

2. SOP for Non-Shariah activities vs Groups PBT

3. Interest Income vs Groups TO
4. Dividend from Non-Shariah investment vs Groups PBT

Phase 1: Quantitative analysis

Step 3: Compare the contribution with the Benchmarks

The rules:-

Non-Shariah compliant if the percentage is above Benchmarks

Phase 2: Qualitative analysis

SAC will consider other factor or criteria before make

a final decision

Company that is considered as Shariah compliant

based on Quantitative analysis may change its status
to non-Shariah company because of this qualitative
analysis and also image of the company.

Phase 2: Qualitative analysis

Qualitative
Public perception or image of the company must be good. In
addition, other element such as `uruf (custom) and maslahah
(benefit in general) to the Muslim ummah (nation) and the
country should also be considered.

Shariah-compliant securities facilitates the

development of the Islamic capital market

Tabung Haji

Stockbrokers

Islamic religious bodies

Bursa Msia

Other institutional
investors

Islamic banks

Retails investors

Islamic UTs

Shariah-compliant securities facilitates the

development of the Islamic capital market
The list is a main source of

reference to Islamic-based

corporations & investors who only invest in Shariahcompliant securities or instruments

The list forms a basis for Shariah index constructed by Bursa
Malaysia
Promotes the growth of Islamic unit trust funds

Shariah-compliant securities facilitates the

development of the Islamic capital market

Spill over effect listed companies re-invest their surplus

funds into Islamic banking accounts to earn profit instead

of interest (riba) [10% benchmark of interest income]

Non-muslim investors who are concerned with social

responsibility

New screening methodology by SCs SAC

The SAC on 18th June 2012 announced the revised screening
methodology
Adopting two-tier quantitative approach:
i.

Business activity benchmarks

ii.

Financial ratio benchmarks

Effective from November 2013

Existing qualitative assessment still applicable

Release twice a year.

New screening methodology by SCs SAC

Quantitative
Assessment
Business activity
benchmarks

Financial ratio
benchmarks

Revised Shariah
Screening
Methodology
5%
20%

33%

Current Shariah
Screening
Methodology
5%
10%
20%
25%
Not Applicable

New screening methodology by SCs SAC

A. Business Activity Benchmarks
1. The 5% benchmark would be applicable to the following business
activities:

conventional banking;
conventional insurance;
gambling;
liquor and liquor-related activities;
pork and pork-related activities;
non-halal food and beverages;
Shariah non-compliant entertainment;
interest income from conventional accounts and instruments;
tobacco and tobacco-related activities; and
other activities deemed non-compliant according to Shariah.

New screening methodology by SCs SAC

2. The 20% benchmark would be applicable to the following activities:

hotel and resort operations;

share trading;
stockbroking business;
rental received from Shariah non-compliant activities; and
other activities deemed non-compliant according to Shariah.

The contribution of Shariah non-compliant activities to the overall revenue

and profit before tax of the company will be calculated and compared against
the relevant business activity benchmarks.

New screening methodology by SCs SAC

Current Shariah screening methodology (business activity benchmark):
Benchmark

Activity

5%

Conventional banking; Conventional insurance; Gambling; Liquor

and liquor-related activities; Pork and pork-related activities; Nonhalal food and beverages; Shariah non-compliant entertainment;
and other activities deemed non-compliant according to Shariah

10%

Interest income from conventional accounts and instruments;

Tobacco and tobacco-related activities; and other activities
deemed non-compliant according to Shariah

20%

Rental received from Shariah non-compliant activities; and other

activities deemed non-compliant according to Shariah

25%

Hotel and resort operations; Share trading; Stockbroking business;

and other activities deemed non-compliant according to Shariah

New screening methodology by SCs SAC

B. Financial Ratio Benchmarks
The financial ratios applied are as follows:
i)

Cash over Total Assets

Cash will only include cash placed in conventional accounts and
instruments, whereas cash placed in Islamic accounts and instruments
will be excluded from the calculation.

ii)

Debt over Total Assets

Debt will only include interest-bearing debt whereas Islamic
debt/financing or sukuk will be excluded from the calculation.

Both ratios, which are intended to measure riba and riba-based

elements within a company's balance sheet, must be lower than 33%.

New screening methodology by SCs SAC

Note:
1. Collective investment schemes and other funds approved by the SC
are given a grace period of six (6) months from the effective date to
dispose of securities that are excluded from the list.
2. During the grace period, all capital gains realised from the sale of such
securities may be retained by the collective investment schemes or
funds, without the need to channel any portion of the capital gains to
charitable bodies or baitulmal.
3. To follow the existing SAC guidance for the disposal of Shariah noncompliant securities after the end of the six-month grace period.
4. Original investment cost may include brokerage cost or other related
transaction costs.

Shariah status prior to listing

(pre-IPO stage)
Prior to October 2004
No disclosure of Shariah status at pre-IPO stage
SC only discloses Shariah status at IPO securities in April

and October

(post listing)
To subscribe IPO securities during the offer period, investors have to

rely on their own research or their own Shariah advisor to advise on

the Shariah status of the securities
Increase in demand from institutional investors including IUT funds as
well as retails investors has lead the SC/SAC to move one step forward
to review securities at pre-IPO stage

Shariah status prior to listing

(pre-IPO stage)
From 1 October 2004
SAC conducts Shariah review at pre-IPO stage
Upon request by issuer (voluntarily) through corporate adviser

Decision to disclose the Shariah status will be left to the issuer

Rationale:

Facilitate issuers in widening their investors base

Facilitates investment process

Enhances market transparency

Case study 1 : Bina Bina Berhad

Main activity Construction
Relevant information

Bina Bina
Berhad

Rock
Sdn. Bhd

Wood
Sdn. Bhd

Cement
Sdn. Bhd

Nails
Sdn. Bhd

Smoke
Sdn. Bhd

Groups information:
TO : RM10 mil
PBT : RM 5 mil
Info. on non-Shariah
compliant activity:
TO (tobacco) : RM 900,000
PBT (tobacco) : RM 400,000

Answer for case study 1 :

Quantitative analysis results
Quantitative
result

Non-Shariah compliant

Calculation

Percentage of tobacco
activity to the Groups TO

RM900,000 /
RM10.0 juta

9%

Percentage of tobacco
activity to the Groups PBT

RM400,000 / RM5.0
juta

8%

Benchmark for tobacco activity : 10% (to the Groups TO and PBT)

Quantitative result:
Shariah compliant (contribution of tobacco activity is below
benchmark)

Case study 2 : Tanam Bina Berhad

Main activity Plantation and construction
Liquor
business

Relevant information

Tanam Bina
Berhad

Subsidiary

Sawit
Sdn. Bhd

Serai
Sdn. Bhd

Associate

Star
Sdn. Bhd

Moon
Sdn. Bhd
Gambling
business

Groups information:
TO : RM 10 million
PBT : RM 5 million

Batu Bata
Sdn. Bhd

Info. on non-Shariah compliant

activity:
TO (liquor) : RM 400,000
PBT (liquor) : RM 120,000
TO (Gambling) : RM 200,000
PBT (Gambling) : RM100,000

Answer for case study 2 :

Quantitative analysis results
Non-Shariah compliant

Calculation

Quantitative
result

Percentage of liquor activity to the Groups TO

RM400,000 / RM10.0 mil

4%

Percentage of liquor activity to the Groups

PBT

RM120,000 / RM5.0 mil

2.4%

Percentage of gambling activity to the Groups

TO

RM200,000 / RM10.0 mil

2%

Percentage of gambling activity to the Groups

PBT

RM100,000 / RM5.0 mil

2%

Benchmark for liquor and gambling activity: 5 % (To the Groups TO and PBT)
Contribution of non-Shariah activity to the Groups:
TO : (4% + 2%) = 6%
PBT : (2.4% + 2%) = 4.4%
Quantitative result:
Non-Shariah compliant (contribution of non-Shariah compliant is above benchmark)

Case study 3 : Easy Berhad

Main activity Manufacturing of furniture and related industry

Interest income

Easy
Berhad

Subsidiary

Timba
Sdn. Bhd

Global
Sdn. Bhd

Associate

Rado
Sdn. Bhd

One
Sdn. Bhd

Gambling business

Relevant information

Center
Sdn. Bhd

Groupsinformation :
TO : RM 2 million
PBT: RM 500,000
Info. on non-Shariah compliant
activity:
Interest income : RM 220,000
SOP (gambling) : RM 24,000

Answer for case study 3 :

Quantitative analysis results
Calculation

Quantitative
result

Percentage of interest
income to the Groups TO

RM220,000 / RM2.0 mil

11%

Percentage of gambling
activity to the Groups PBT
(SOP)

RM24,000 / RM500,000

4.8%

Non-Shariah compliant

Benchmark for interest income : 10 % (To the Groups TO)

Benchmark for gambling activity : 5% (To the Groups TO and PBT)

Quantitative result :
Non-Shariah compliant (contribution of interest income is above
benchmark)

Case study 4 : Megamart Berhad

Principal activity service of hypermarket and other related activities
Hypermart
Bhd

Sale of liquor

Related information
Interest income

Subsidiary
Blue Moon
Supermarket Sdn
Bhd

Pasar Ria
Sdn Bhd

Sure Win
Sdn Bhd

Non-permissible activities
info:
TO liquor: RM 0.35 mln
PBT liquor: RM 0.12 mln

Associated

LP Resources
Sdn

Group info:
Group TO: RM 10 mln
Group PBT: RM 5 mln
Group Int. Income: RM 0.8 mln

Hypermart
Bhd
Gaming business

TO gaming: RM 0.19 mln

PBT gaming: RM 0.1 mln

Answer for case study 4 :

Quantitative analysis results
Non-permissible

Calculation

Quantitative result

Interest income to Group TO

RM0.8 mln/ RM10 mln

8%

Percentage of liquor to Group TO

RM0.35 mln/ RM10 mln

3.50%

Percentage of liquor to Group PBT

RM0.12 mln / RM5 mln

2.40%

Percentage of gaming to Group TO

RM0.19 mln / RM10 mln

1.90%

Percentage of gaming to Group PBT

RM0.1 mln / RM5.0 mln

2%

Benchmark for interest income: 10% of Group TO

Benchmark for liquor and gaming: 5% of Group TO or Group PBT
Contribution from interest income and non-compliant activities:
Interest income: 8%
Group TO: 5.4% (TO liquor + TO gaming)
Group PBT: 4.4% (PBT liquor + PBT gaming)
Pre-compliance result:
Non-approved securities

Shariah guidance on investment in

non-compliant securities
Case 1: Investment in compliant securities subsequently
reclassified as non-compliant
Price of non-compliant securities
On the announcement day

Price > original

investment cost
liquidate
immediately

Any capital gain

from disposal
can
be kept by
investors

Price < Original

Investment Cost
Hold until the
price of securities
equal to original
investment cost

Dividends
received can be
used to expedite
the disposal

After the announcement day

Price > Original Investment
Cost

Price < Original

Investment Cost

Liquidate immediately

Profit (difference btw

original investment cost
and closing price of
announcement date)
can be kept

Profit (difference
between disposal price
and closing price of
announcement date)
channeled to charitable
bodies

Hold until the price

of securities equal
to original
investment cost

Dividends received
can be used to
expedite the
disposal

Example
Investment Cost
(2 January)

Announcement date
(25 April)

Disposal price
(3 June)

5.50

6.00

7.50

Profit kept by
investor
(RM0.50)

Profit to be
channeled to
charitable bodies
(RM1.50)

Investment cost = RM 5.50/share

Closing price on the announcement date = RM6.00/share
Disposal Price = RM7.50/share
If investor disposes securities on 3 June, the capital gain is RM2
per share. He is only eligible to keep the profit of RM0.50 per share
While RM1.50 should be channeled to charitable bodies)

Shariah guidance on investment in

non-compliant securities
Case 2 : Investment in (existing) non-compliant securities
Investors to dispose their non-compliant securities within a month
of knowing the status of the securities.
Any gain made in the form of capital gain or dividend received
during or after the disposal of the securities to be channelled to
charitable bodies.
Investors are entitled to keep their original investment cost

Islamic Unit Trust Funds

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.
A typical structure of a Shariah-based unit trust fund consists of:
A manager - handles the investment and operations of the
fund;
A trustee - protects the rights and interests of the unit
holders; and
Unit holders investors who are entitled to a proportionate
interest of the assets of the fund. The obligations of these three
parties are spelt out in the deed of the fund.

Islamic Unit Trust Funds

The Shariah-compliant instruments particularly the

Shariah-compliant securities (shares) are the main
source of investment for the Shariah-based unit trust
fund.
The investment objectives of Shariah-based unit trust
funds vary according to the type of fund. It determines
the riskiness of a fund and the kind of investor the fund
is targeting.

Islamic Unit Trust Funds

1. Income funds

Invests in Islamic fixed income securities and huge dividend-yielding

Shariah-compliant shares, with a view to pay out most of the returns
Suitable for investors with low-risk appetite, seeking income with some
level of growth

2. Capital growth funds

Invests in Shariah-compliant shares, with a view to maximize capital growth
over the long-term (i.e. through a higher unit price)
Suitable for investors with high-risk appetite and are keen on capital
accumulation
3. Aggressive growth funds
Similar to capital growth funds but with investments in aggressive, fast
track Shariah-compliant shares that promise high returns, but with higher
risk

Suitable for investors with high-risk appetite

Islamic Unit Trust Funds (cont)

4. Balanced funds
Three main objectives: income; moderate capital appreciation; and
capital preservation
Invests across a broad range of asset categories including Shariahcompliant shares, Islamic fixed income securities and cash
Well-diversified and suitable for investors seeking reasonably safe
investments where the risks are lower and which produce average
returns
5. Index funds
Invests in a basket of Shariah-compliant shares to track the
performance of a selected stock market index
Suitable for
appreciation

investors

seeking

medium

to

long-term

capital

Islamic Unit Trust Funds (cont)

6. Sukuk funds
Invests in Islamic fixed income securities such as Islamic
bonds and short-term money-market instruments
Suitable for investors seeking greater security in the form of
capital preservation and income with minimal risk

Islamic Unit Trust Funds (cont)

Guidelines of Unit Trust Funds was formulated with the aim of

providing a regulatory environment that would protect the
interest of investing public and facilitate the orderly
development of unit trust industry

Issued under the ambit of SCA 1993

Specific regulatory requirements for Islamic unit trust funds are

set out in the Guidelines

Establishment of an Islamic fund requires similar approval process

and compliance as outlined in the Guidelines

Investment objectives of Islamic funds

Islamic unit trust funds
The investment to be made by an Islamic fund must be
adequately disclosed in the prospectus of the fund
An Islamic fund is allowed to invest in (with investment spread
restriction)

Listed securities

Unlisted securities

Foreign securities

Other collective investment scheme

Futures contracts

Liquid assets

.. Provided the above are approved by the funds Shariah

committee or SCs SAC

Appointment of the Shariah Committee /

Shariah Adviser
Islamic unit trust funds
A Shariah committee / Shariah adviser must be appointed
when a fund is expressed to be managed and administered in
accordance with Shariah principles
The Shariah committee members must

Consist of at least 3 individual members who have been

registered with SC

Appointment of the Shariah Committee /

Shariah Adviser (cont)
Islamic unit trust funds
If Shariah adviser is appointed

The company must have in its employment, at least one

full-time designated Shariah officer

The company must be registered with SC

The designated Shariah officer must satisfy similar

requirements imposed on individuals
The appointment of a Shariah committee or Shariah adviser
must also be approved by SC

Roles, Power and Duties of

Shariah Committee /Shariah Adviser
Islamic unit trust funds
To ensure that the fund is managed and administered in
accordance with Shariah principles

To provide expertise and guidance in all matters relating to

Shariah principles, including on the funds deed and
prospectus, its structrure and investment process, and other
operational and administrative matters

Roles, Power and Duties of

Shariah Committee /Shariah Adviser (cont)
Islamic unit trust funds
To scrutinise the funds compliance report as provided by the
compliance officer and investment transaction reports
provided by the trustee to ensure Shariah compliance
To prepare a report in the funds interim and annual reports
certifying Shariah compliance of the fund
To consult SC (including SAC) when there is any ambiguity or
uncertainty as to an investment, instrument, system,
procedure and/or process

Other requirements
Islamic unit trust funds
Where the fund is an Islamic fund

the investment committee must comprise at least two

Muslim members ; at least one Muslim member must
be present before an investment committee can
convene its meeting

The designated person responsible for compliance

matters of the management company must have basic
knowledge of Shariah principles

What is an Islamic REITs?

1.

An Islamic REITs is a collective investment scheme in real

estate in which the tenants operate a permissible activities
according to Shariah

2.

An Islamic REIT must also ensure that all forms of investment

and financing instruments comply with Shariah principle

Facilitative Malaysian
Government Policies

1.

Exemption on real property gains tax (RPGT) for the disposal

of real estate by individuals and companies to REITs

2.

Tax transparency, REITs were exempted from income tax on

chargeable income if income is distributed

Facilitative Malaysian
Government Policies (cont)
3. Incentives
Lower withholding tax on dividend from REITs listed on
Bursa Malaysia
For the non resident investors i.e. 15% Dividend from
REITs listed on Bursa Malaysia for foreign institutional
subject to 20% withholding tax
REITS be exempted from tax on all income provided that
at least 90% of the total income is distributed to
investors

Conventional vs Islamic REIT

Types of
REITs/Criteria

Conventional REITs

Islamic REITs

Shariah
adviser

No Shariah adviser

Appointment of Shariah
Adviser is compulsory

Investment
instruments

At least 50% of a funds total

assets value must be invested
in real estate and/or singlepurpose companies at all time.
The rest of 25% may be
invested in non-real estate
related assets and/or cash,
deposits and money market
instruments

The 50% of listed funds

total assets must follow
Shariah requirements. The
rest of 25% must be
invested in investment
comply with Shariah
principles

Rental
restriction

No restrictions on the tenants

nature of business as long as it
is legitimate by Malaysian Law

The percentage of rental

from non-permissible
activities should not exceed
20% benchmark set by SC

Conventional vs Islamic REIT (cont)

Types of
REITs/Criteria

Conventional REITs

Islamic REITs

Financing
instruments

The total borrowings of the

fund must not exceed 50% of
the total asset value of the
fund
Either conventional or Islamic
instruments

The basis of 50% is

similar to conventional
REITs, however fund
managers must ensure
that financing
instruments comply with
Shariah principles

Insurance

The REITs must have insurance

to protect its assets. Can be
Takaful or conventional
insurance.

Must use Takaful.

However, if Takaful is
unable to provide
insurance coverage,
permitted to use
conventional insurance
schemes

Who are involves in I-REITs?

1. Manager
2. Trustee
3. Shariah Advisor
4. Property Manager
5. Unit holders/investors

Islamic REITs
REITs investment Shariah Compliant?

Rental Income Shariah Compliant?

Unit holders

Investment

Manager

Acts on behalf of
Unit holders

Management
services
REIT

Management fees

Property
Manager

Distributions

Ownership
of
Properties
Maintenance and
management
services
Maintenance and
management fees

Trustee

Trustee fees
Net
Property
Income
Rent

Rental payment
Properties

Tenant

Islamic REITs
1. Shariah parameters for Islamic REITs

Islamic REITs investment must be reviewed, monitored and

approved by the appointed Shariah committee / Shariah
adviser

Rental of real estate by Islamic REITs

Investment, deposit and financing for Islamic REITs
Insurance
Forward sales or purchases of currency for risk
management

Islamic REITs (cont)

2. Permissible activities

What activities are permissible under Shariah?

In a position where mixed activities (permissible and nonpermissible) are carried out in the same premises

How to decide whether an Islamic REIT may purchase a

property with mixed activities?

Islamic REITs (cont)

3. Islamic REITs Rental as main income stream for investors
4. Rental activities classified as Shariah permissible except :
Financial services based on riba (interest)
Gambling/gaming
Conventional insurance
Entertainment activities that are not permissible
according to the Shariah
Manufacture or sale of tobacco based products
or related products
Stockbroking or share trading in Shariah noncompliant securities
Hotels and resorts

Islamic REITs (cont)

5. Mixed activities - Permissible and Non-permissible activities
SC Guidelines where mixed activities are carried out on the
Islamic REIT, manager must conduct additional compliance
assessments:
a. Aggregating rental from non-permissible activities of the
properties
b. Ascertaining the proportion to the aggregated rental to
total Turnover of the Islamic REIT
c. If percentage of the non-permissible rental exceed 20% of
total turnover, fund manager cannot invest in the
property

Islamic REITs (cont)

d.

The 20% benchmark is set by the Shariah Advisory Council

(SAC) of SC as the threshold on rental from non-permissible
activities that is allowed in an Islamic REIT

e.

Guidelines also provides a formula for calculating the

proportion of rental paid for non-permissible activities over
the total rental paid by a tenant operating mixed activities

f.

The formula is based on area occupied for non-permissible

activities to the total area occupied

Islamic REITs (cont)

6.

Rental of Real Estate by Islamic REIT for business purposes:

Acquiring real estate with existing tenant(s)

Tenant(s) operates permissible activities according to the
Shariah
If tenants operate non-permissible activities:
Percentage of rental from non permissible activities
should not exceed 20% of the Islamic REIT TO
However, an Islamic REIT is not permitted to own a real
estate where ALL the tenants operate non-permissible
activities even though % of rental not exceed 20%

Islamic REITs (cont)

7. Renting out real estate to a new tenant(s)
Shariah committee/Shariah adviser must advise the
Islamic REIT fund manager not to accept a new tenant(s)
whose activities are fully non-permissible

8. Rental paid by a tenant(s) operating mixed activities (nonpermissible and permissible activities)
Calculation would be based on the ratio of area
occupied
for non-permissible activities to the
total area occupied
For activities that do not involve the usage of space,
such
as service-based activities, the
calculation method will be
based on the
ijtihad of the Shariah committee/Shariah
adviser of the Islamic REIT

Example : Rental from Non Permissible

Activities against TO
ABC TOWER

100% Non
Permissible
100% Permissible

Turn Over (TO) Islamic REITs = RM1,000,000

Total rental I.e. Non Shariah Compliant (A+B+C+D) = RM210,000
Therefore: 210,000 /1,000,000 X 100 = 21% (Exceed 20%)

Example : Rental from Mixed Activities

ABC TOWER

Mixed Activities

100% Non Permissible

supermarket

100% Permissible

Rental from Supermarket: RM3000

Total Area: 1000 sq ft
Area occupied by Liquor: 100 sq ft
% Area occupied by Liquor :
100 /1000

X 100 = 10%

Therefore, Non Shariah

Compliant Rental:
10 % X RM3000 = RM300

Islamic REITs (cont)

9.

Investment, deposit and financing for Islamic REIT

All forms of investment, deposit and financing instruments
comply with the Shariah principles

10. Insurance
Takaful (Islamic insurance) schemes to insure its real estate.
If the Takaful schemes are unable to provide the insurance
coverage, then the Islamic REIT is permitted to use the
conventional insurance schemes.

Islamic REITs (cont)

11. Forward sales or purchase of currency risk management
Permitted to participate in forward sales or purchases of
currency, and
Encouraged to deal with Islamic financial institutions.
If the Islamic REIT deals with Islamic financial
institutions, then it will be bound by the concept of
waad (only one party is obligated to fulfil his
promise/responsibility). The party that is bound is the
party that initiates the promise.
However if the Islamic REIT deals with conventional
financial institutions, it is permitted to participate in
the conventional forward sales or purchases of
currency.

Islamic Venture Capital

and Private Equity
SC issued Guidelines & Best Practices on Islamic Venture Capital May
2008
Significant enabler for the growth of ICM in Malaysia
To assist venture capital corporations and management in carrying
out Islamic venture capital businesses or activities
Two fundamental requirements:
1. The appointment of Syariah Adviser
2. The core activities of the investee company must be Syariahcompliant

Islamic Venture Capital

and Private Equity (cont)
Conceptual Structure
ABC Venture Bhd

XYZ Water Bhd

50%

50%

ABCXYZ Water Investments Management Pte Ltd

Fund Investors

ABCXYZ Water Fund

Board and Fund Administrator

Target SPVs
1,2,

Syariah Adviser

Requirements for Islamic venture capital

Two-basicrequirements
requirements
Two-basic

ShariahAdviser
Adviser
Shariah

Shariah-compliantactivities
activities
Shariah-compliant
Non-permitted activities:
i. Financial services based on riba (interest)

i. To provide expertise and guidance on all

Shariah matters including:
Portfolio management, trading practices
Documentation, structuring & investment
Maintenance of accounts
Scrutinising any compliance report
prepared by Shariah compliance officer
Prepare a written disclosure and
declaration to the Board of Directors
Administrative and other operational
matters

ii. Gambling/gaming
iii. Manufacture or sale of non-halal products or related
products
iv. Conventional insurance
v. Entertainment activities that are non-permissible
according to Syariah
vi. Manufacture or sale of tobacco-based products or
related products
vii.Stockbroking or share trading in Syariah noncompliant securities
viii.Hotels and resorts; and
ix. Other activities deemed non-permissible according
to Shariah.

Requirements for
Islamic venture capital (cont)
Responsibilitiesof
ofaaShariah
ShariahAdviser
Adviser
Responsibilities
1.

To ensure all aspects of the Islamic venture capital business activities including
portfolio management, trading practices, and other administrative and
operational matters are in accordance with Shariah principles;

2.

To provide Shariah expertise and guidance on all matters, particularly in regard to

documentation, structuring, and investment instruments, and ensure
compliance with the general Shariah principles and regulations, standards or
resolutions;

3.

To take responsibility in scrutinising any compliance report prepared by the

Shariah compliance officer or any investment transaction report, to ensure
that the investment activities are Shariah compliant; and

4.

To provide a written opinion and/or periodic report to confirm and certify that the
Islamic venture capital have been managed and/or administered in accordance
with Shariah principles.

Requirements for
Islamic venture capital (cont)
Writtendeclaration
declarationby
byShariah
ShariahAdviser
Adviser
Written
The Shariah adviser is expected to prepare, at least on an annual basis, a written
disclosure and declaration to the board of directors that the Islamic venture capital is
managed in accordance with Shariah principles.
ComplianceOfficer
Officer
Compliance
An Islamic venture capital is encouraged to appoint a compliance officer for the purposes
of ensuring the companys full compliance with the specific requirements for an Islamic
venture capital.
Reportany
anyShariah
Shariahnon-compliance
non-compliancedirectly
directlytotothe
theShariah
Shariahadviser
adviser
1.1. Report
andthe
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forconsideration
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and/orimmediate
immediate
and
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and
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Assistthe
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2.2. Assist
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Thecompliance
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expectedtotoensure
ensurethat
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written
3.3. The
disclosureand
anddeclaration
declarationmade
madeby
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Shariahadviser
adviserand
andother
other
disclosure
compliancerecords
recordsare
aremaintained
maintainedas
asrequired.
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encouragedtotoacquire
acquirebasic
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4.4. AAcompliance
Islamicfinance.
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Islamic

Requirements for
Islamic venture capital (cont)
1.

2.

Portfoliomanagement
management
Portfolio
Any investment decision, either local or abroad, is expected to be endorsed by
the Shariah adviser to ensure that the investment complies with the general
Shariah principles and regulations, standards or resolutions issued by an
established or recognised Shariah authority or body.
An Islamic venture capital is expected to ensure that the activities of the venture
companies remain Shariah compliant until the point of full divestment.

Maintenanceof
ofaccounts
accounts
Maintenance
An Islamic venture capital is expected to ensure that its clients monies or properties
are properly managed in accordance to Shariah principles. In particular:
Expected to maintain Shariah-based accounts; and
Where a venture capital management company is managing on behalf of other
venture capital company, it must segregate the funds managed for an Islamic
venture capital from those for a conventional venture capital.

Any Questions?

All praise is due to Allah, Lord of All the

Worlds

Thank You.