Jun

ne 2009 Issu
ue #24

Isllam
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Bullleti n
..………….………………………………………………
Tow
wards an infformed
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Dhurrry Cash Awqaf

A – Op
pportunitie
es for the General
Islamiic Finance Bullletin, a Umm
mah
quarteerly release on
n the Islamic
capital market in Ma alaysia, is
dedica
ated to informming and
educating those acttive in the
growinng market of Islamic
I financ
ce
Going For Conventional or Islamic
c Financing
g? – A Tax
x
on issu
ues, developm ments and Cons
sideration
trendss in the domes stic Islamic
capital market.

The coontents are intended to be Finan

ncial Deriv
vatives fro
om Islamic
c Perspectiive
educational, to acceelerate the
learnin
ng curve of th
hose new to
Islamiic finance and
d to stimulate
further discussions, research and d
develoopment - all with
w a view to
Risk Associated with Isla
amic Finan
ncial Contrracts: Partt 6
enabliing the Malayssian Islamic
capital market to efffectively meeet
the inccreasing soph
histication of th
he
investtment commun nity. Suku
uk Rating: General Approach,
A Criteria and
Meth
hodology
Should d you wish to share any
views or comments s, or to
contribbute to the buulletin by way
y of
editoriials, please se
end your e-ma ail
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Ringg
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eport
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TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF
Dhurry Cash Awqaf – Opportunities for
the General Ummah
Jamil Ramly
Islamic Banking and Finance Institute Malaysia Sdn Bhd
Concept and Philosophy of
Cash Waqf
T
he literal meaning of waqf (plural
awqaf) is “detention”, “to
prevent” or “to restraint”. From
the fiqh definition, waqf has 4 essential
elements:
1. Waqif – the owner of the property to
be waqf
2. Mauquf – the property to be waqf
3. Mauquf alaih – the recipient of the
income/revenue from mauquf
4. Sighah – the contract
The administrator is known as the Nazir
al-waqf or Mutawalli. The subject matter
to be waqf can generally be categorised as
manqul (movable) or aqar (immovable).
Thus, waqf is a commendable and pious
act to dedicate property1 of any kind,
permanently dedicated by a Muslim for
any activities or the management of
investment portfolios recognised by
Islam, for an enduring charitable or
religious object that secures any benefit to
human beings and its ain (material
1
Property includes any movable or immovable
property and any interest in any movable or
immovable property, any right, interest, title,
claim, chose in action, whether present or future
or which otherwise of value in accordance with
Hukm Shara’ (Sec 2 – Wakah (State of
Selangor) Enactment 1999 (No.7 of 1999)
Islamic Finance Bulletin April - June 2009
IBFIM
elements) remains intact. In short, waqf is
a permanent, irrevocable transfer of a
portion of one’s property (movable or
immovable assets) to Allah for His
pleasure. The said property thus becomes
Allah’s property forever.
There are 2 types of waqf, namely Waqf
Am2 and Waqf Khas3. Waqf Khas is
further sub-divided into Waqf
Ahli/dhurri4 and Waqf Specific5.
Legitimacy of Waqf
As quoted in the Quran: “The parable of
those who spend their wealth in the way
of Allah is that of a grain of corn; it
grows seven ears, and each ear has a
hundred grains. Allah gives manifold
increase to whom He pleases; and Allah
is ample, all-Knowing”6.
2
Waqf Am - any waqf that is created for a
general charitable purpose, i.e. for general public
according to Hukm Shara’.
3
Waqf Khas - a waqf that is created for a
specified charitable purpose according to Hukm
Shara’.
4
Waqf Ahli/dzurri - a waqf where the
beneficiaries are family members.
5
Waqf Specific - a special waqf (Waqf Khas)
where the beneficiary is named specifically, e.g.
for an orphanage, a hospital, or a tahfiz school.
6
Al-Baqarah: 261
Issue #24 1
TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF
The hadith of the Prophet (s.a.w.) quotes
that: “When the son of Adam dies, his
deeds comes to an end, except with
enduring benefits (sadaqah jariyah), his
knowledge which benefits others and his
virtuous son; they pray for him”.7
It was stated at the time of the Prophet
(s.a.w.), when Umar, the second Caliph,
at the partition of Khaybar, acquired a
piece of land named Thamgh, which he
treasured. He came to the Prophet (s.a.w),
seeking his advice on it. He said: “O
Prophet! I have obtained a piece of land
in Khaybar, which is the best of all
properties I have ever owned. What is
your opinion on putting it to use in the
name of Allah?” The Prophet (s.a.w.)
said: “If you wish, retain the real and
devote its usufruct to pious purposes.”8
Umar accordingly dedicated the property,
on condition that the land should neither
be sold nor made the subject of a gift or
inheritance. The income alone should be
spent on the poor and relatives and on
freeing the slaves and on the services
rendered to travellers and on hospitality.
The administrator shall have the power to
take some of its income; the rest of it
would be used for feeding others, not
accumulating riches.
The Unique Nature of Waqf
ƒ Waqf is a commendable and pious act
ƒ Waqf is a form of an enduring charity
ƒ Waqf assets cannot be sold, given as a
gift or inherited
There is a clear distinction between:
ƒ one who holds it in trust
(administrator); and
7
Hadith reported in Sahih Muslim.
8
A hadith reported by Sahih al-Bukhari as
narrated by Ibn Umar.
Islamic Finance Bulletin April - June 2009
IBFIM
ƒ one who derives benefits from it
(beneficiary).
Review of Waqf Institution
The trustee is usually an institution. One
of the most important waqf institutions is
the mosque. The first waqf mosque was
the Qubah mosque, built by the Prophet
(s.a.w.) after migrating from Mecca to
Medina. Later, in Medina, the Prophet
(s.a.w.) had built a second mosque known
as Masjid Nabawi. In the early days of
Islam, mosques had acted as premier
educational institutions. These included
the Fustat Mosque, Qairawan Mosque
and Azhar Mosque.
In this classical waqf, the contributor is
the donor that creates the trust, appoints
the trustee(s) and designates the
beneficiary. The donor may appoint any
person or institution he trusts to serve as
trustee. In the contemporary waqf, the
institution is a regulated body or council
appointed by the federal or state
government to run the waqf
properties/fund.
Waqf may be in the form of grants.
Between the fifth and twelfth centuries
Hijrah, there had been about 70 waqf
schools. Libraries have also been
contributed as waqf assets. The first waqf
library was the House of Knowledge,
established by Abu el-Qasem Ja’afar bin
Muhammad al-Faqih al-Shafei’. Waqf in
the form of institutions such as hospitals
used to give free medical treatment. There
had been about 50 waqf hospitals in the
Spanish city of Cordova. Waqf properties
can also take the form of public
infrastructure such as bridges, roads and
public toilet. Waqf income has been
allotted to the poor, the needy and
wayfarers.
Issue #24 2
TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF

Moving forward - Cash for from the public and corporates. The
pooled cash is invested in SIBL’s
Waqf
investment portfolios, the proceeds
derived from such investments are then
Imam Zufar, a Hanafi scholar, is of the
distributed to the general public. SIBL
opinion that cash9 can be waqf based on
imposes administrative charges from the
urf (customary practice). Sheikh
proceeds, prior to distribution. Malaysia,
Muhammad Syarbini Khatib is of the
through the Labuan IOFC, has launched
opinion that cash can be waqf if it serves
the Cash Waqf Certificate to fund off-
as money10. According to the ruling, the
shore financing activities. National Awqaf
manager can mobilise funds in the form
Foundation of South Africa (Awqaf SA)
of cash, to be used to acquire “property
also collects from the public who wish to
with mal”. Cash in this context is only the
endow cash for waqf; it uses the income
medium used to acquire the “asset with
generated from investments to fund a
value”11.
variety of community development
projects and programmes which promote
Cash waqf was first introduced in the
integrated community development and
Ottoman era in Egypt. Waqf fund had
self-reliance.
been given as seed capital to the third
party to carry out their investment under
The waqf institution will manage the
murabahah trading or mudharabah
administration and investment portfolios,
investment. Upon maturity, the capital
pool the cash waqf proceeds and
and the profit - after administrative
distribute to the beneficiaries prescribed
charges – would be returned to the waqf
in the waqf deeds; the beneficiaries are
administrator. These pools of profits
the family members of the
derived from such activities had been
contributor/donor. This modus operandi is
distributed to the general public through
known as Cash Waqf Ahli or Dhurry Cash
cash payments for services rendered, or
Waqf or Family Cash Waqf. Shariah
subsidised the payment for maintenance
approves the cash waqf ahli/dhurry,
of the public properties.
where the usufruct of the proceeds can be
for 2 generations. Upon the expiry of the
Socialisation of Cash Waqf second generation, the said created cash
waqf will be transformed into the waqf
Professor Mannan socialised cash waqf in am or general waqf. The beauty of this is
Bangladesh, through Social Investment that ordinary people can create the waqf
Bank Limited (“SIBL”). SIBL issues through annuity payments into the pool
Cash Waqf Certificates to collect funds waqf account, and the family member can
benefit from the investment proceeds of
this account.
9
Please refer to Hasyiah Rad al-Mukhtar (pgs
361-363) by Ibn ‘Abidin. Normally, existing Cash Waqf Ahli or
10
As a medium of exchange; measure for value; Dhurry Cash Waqf creates opportunities
standard deferred payment and store of wealth for the wealthy and deprives the less
and a liquid asset.
11 fortunate from performing waqf. A new
Ref: Shamsuddin Ibn Khudamah; Al-
Mughni wa ya lihi al-Sharhul al-Kabir Vol 6 model opens up opportunities to the
(pg 192). Syed Ahmad bin Omar al-Shatiri; general ummah, and the less wealthy
Al-Yaqut al-Nafis fi Mazhab Ibnu Idris (pg segment of society can do their part. This
117).

Islamic Finance Bulletin April - June 2009 Issue #24 3

IBFIM
TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF
proposal is for a number of persons
donating their small resources in the form
of cash into a pooled fund, making the
pool big enough to be able to acquire a
worthwhile asset to become a perpetual
source of income that caters to the needs
of the less fortunate members of Muslim
society. Therefore, the cash must first
come from the donors. Receipts,
certificates and/or Cash Waqf statements
have to be issued to the donors to make
them feel comfortable that their donations
are not wrongly used, and also to keep
records of the donations. The original rule
of waqf is that the waqif manages his own
waqf or the authority in society manages
the waqf; as there are many donors and
their individual donations are small, a
manager needs to be appointed to collect
the donations, pool them into a fund,
acquire assets from the fund, and manage
them so as to get returns for distribution.
The manager also asks permission from
the donors to manage the asset.
Dhurry Cash Awqaf Model
Objective: To facilitate the establishment
of a fund known as the Cash Waqf Fund
(“CWF”), and to allow the institution or
recognised body (as the mutawalli) to
manage12 the CWF professionally.
Operationalisation of the Dhurry Cash
Awqaf
Other Required Approval
Upon approval by State Waqf authority.
Perceived Value
Waqf of Cash
12
It refers to the management of investment
portfolios and the distribution of revenue/profit
according to waqf deeds.
Islamic Finance Bulletin April - June 2009
IBFIM
Contribution of cash for waqf. Essential
elements of Cash Waqf:
1. Waqif - contributor/donor
2. Mauquf - subject matter -
money/Nuqud
3. Mauquf a’laih - beneficiaries are the
family member(s) of the contributor
4. Sighah (binding contract)
Contributor/Donor/Waqif
ƒ To give opportunity to those who do
not own property but still wish to
contribute waqf in an alternative
form.
ƒ Waqif has a platform to contribute the
waqf to the professional
trustee/foundation.
ƒ Individuals may be allowed to make
monthly salary deductions or through
standing instructions.
ƒ Incentive may be in the form of tax
rebate/exemption for the individual
donor.
Administrator
ƒ To facilitate a mutually beneficial
arrangement between the donor
(waqif), a foundation (Nazir al-waqf
or mutawalli), and the beneficiaries.
ƒ The Nazir al-waqf or mutawalli that
can benefit from the fee-based
transaction (management fee for
managing the waqf fund).
ƒ Management fee can be priced
according to market practice, as it is
up to the wisdom of management.
Beneficiaries
ƒ Beneficiaries who are the family
members of the waqif can benefit
from the said established institution,
by receiving the allocated sum either
in the form of a grant, cash or other
acceptable means, as per the waqf
deeds.
Issue #24 4
TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF
Cash Waqf Support Islamic Financial
Market
ƒ Cash Waqf pooled funds can create a
perpetual Islamic source of fund to
support domestic financial markets
and international Islamic financial
markets, through the utilisation of
Islamic financial tools.
Stages in Dhurry Cash Waqf
Creation of Cash Waqf Fund
Receive cash for waqf from
contributors/donors (waqif). A foundation
(Nazir al-waqf or Mutawalli) will issue a
certificate (cash waqf certificates) and/or
Cash Waqf statements that are updated
semi-annually. The donor (waqif) will
receive the said certificates and/or Cash
Waqf statements as evidence of
contribution. The collection of such
contributions will be pooled. The pooled
fund will be called the Cash Waqf Fund
(or CWF). There may be 3 CWF pools:
the Dhurry Cash Waqf, the Specific Cash
Waqf and the Cash Waqf Am, classified
according to its deed.
Dhurry Cash Awqaf
Refers to cash for waqf, with the
condition that the proceeds from the
revenue generated is meant for specific
beneficiaries with a particular tenure, e.g.
to be given to the identified beneficiaries
for 2 generations. Upon the expiry of the
said tenure, the cash will be distributed
and pooled into the Cash Waqf Am.
Cash Waqf Am
Refers to cash for waqf without
conditions. It is meant for general
purposes, but within the boundaries of
Shariah.
Islamic Finance Bulletin April - June 2009
IBFIM
Cash Waqf Specific
Refers to an individual or a corporation
that wishes to give cash or assets to
specific beneficiaries, e.g. money
contributed by the party, where the
proceeds from the revenue will be
distributed to specific beneficiaries, such
as for research and development, a
foundation or an institute.
Investment Avenues
Cash Waqf funds may be invested in
diversified portfolios of Shariah-
compliant investment avenues.
Investment portfolios are diversified to
spread the risks. The proceeds from the
investment portfolios are for distribution
to the specific beneficiaries.
In case of losses due to normal and
prudent practices, the investment
portfolio’s account may absorb the loss.
Appointment of Professional
Management Company
Shariah has laid down the responsibilities
of the mutawalli. The salient terms of the
mutawalli include, but are not limited to,
the following:
ƒ The mutawalli should be capable of
managing the waqf fund, to be a
productive source of capital.
ƒ Administrating and monitoring the
collection of the CWF, such as
opening the Cash Waqf Account for
the individual waqif and identifying
the beneficiaries as per the Dhurry
Cash Awqaf deeds.
ƒ Administrating, managing and
monitoring the pool of cash waqf
funds through the investment
portfolio’s management policy and
schemes that are Shariah-compliant.
ƒ Administrating, managing and
monitoring the investment returns in
terms of profits or dividends derived
from such investments.
ƒ Administrating, managing and
monitoring the distribution of the said
Issue #24 5
TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF

returns to the beneficiaries Conclusion

accordingly.
ƒ The mutawalli may appoint or
outsource to third parties to manage
part of the funds as part of the
investment strategies.
ƒ The mutawalli, as the manager, is
entitled to the management fee for the
services rendered in managing the
fund.
Pool of Profit/Revenue Generated from
the Investment
Proceeds from the investment avenues in
the form of rental, profits, commissions,
fee-based transactions and dividends shall
be pooled prior to distribution to the
beneficiaries.
Distribution of revenue
Revenue will be distributed according to
the waqf deeds.
ƒ Distributed to the general
beneficiaries/reinvested into the pool
CWF.
ƒ Distributed to specific beneficiaries
(as per the Dhurry Cash Awqaf and
Specific Cash Waqf deed).
We are proposing a new waqf model that
is capable of enhancing waqf activities in
contemporary Muslim society. This is the
organised voluntary waqf, by creating a
waqf pool fund via issuing waqf
certificates and/or cash waqf statements,
which are evidence of waqf contributions
by potential waqifs. The pooled fund is
invested according to Shariah principles,
to generate income/revenue. The
income/revenue from the said diversified
portfolios is then pooled for distribution,
according to the identified beneficiaries
as per the waqf deeds.
In this respect, the role of such a waqf
administration would be to develop and
manage the established Cash Waqf for
income/revenue generation. Cash Waqf is
a facility provided by the mutawalli, as a
platform for the potential individuals as
waqifs, to contribute waqf favouring the
identified beneficiaries according to the
waqf deeds.

The Dhurry Cash Waqf is for specific

named beneficiaries. The beneficiaries
only receive the proceeds up to a
particular tenure. Upon expiry of the
tenure, the entire proceeds will go to the
general cash waqf pool.

The mutawalli only gets a management

fee for the services rendered in managing
the fund. The management company is
not entitled to distributions on the
generated revenue.

Islamic Finance Bulletin April - June 2009 Issue #24 6

IBFIM
TOWARDS AN INFORMED MARKET
DHURRY CASH AWQAF
Jamil Ramly has been in the banking and
finance industry for more than 25 years,
including 2 decades in Islamic finance. His
strength lies in his vast knowledge of Islamic
finance, as well as its development and
enhancement. Jamil is also a competent
trainer in Islamic finance. Particularly keen
on the development of new Islamic banking
and financial products, he has been involved
in various research and development
programmes in this sphere.
Jamil is currently a Senior Manager in
IBFIM’s Certification Programme. Before
this, he had been the organisation’s Head of
Structured Programme, developing the
Certified Islamic Financial Planner (or IFP)
programme, which confers a licence to
practice financial planning; and IBFIM’s
progressive programmes on professional
accreditation in Islamic Banking Practice
Qualification (or IBPQ) and Takaful Practice
Qualification (or TPQ).
Prior to that, he had been attached to the
CEO’s Office under special project
development and the delivery of cash waqf for
LOFSA IOFC. He had also been part of the
secretariat for the IIFM Sub-Committee as
well as the SC Legal and Shariah Sub-
Committees.
Jamil graduated with an MBA in Islamic
Banking and Finance from the International
Islamic University Malaysia, where he is
currently pursuing a PhD in Islamic Banking.
Islamic Finance Bulletin April - June 2009
IBFIM
For more information, please contact:
Islamic Banking and Finance Institute
Malaysia Sdn Bhd (340040-M)
Level 3, Dataran Kewangan Darul Takaful
Jalan Sultan Sulaiman
50000 Kuala Lumpur, Malaysia
Tel: +603-2031 1010
Fax: +603-2031 9191
E-mail: info@ibfim.com
Website: www.ibfim.com.my
ISLAMIC BANKING AND FINANCE
INSTITUTE MALAYSIA SDN BHD
Islamic Banking and Finance Institute
Malaysia Sdn Bhd (IBFIM) is an institute
dedicated to producing well-trained, high-
calibre individuals and management teams
with the required expertise in the Islamic
finance industry.
Based on the industry’s demands and
customers’ needs, we provide complete
assistance to our clients through a wide
spectrum of inter-related services: training
and education, advisory and consultancy, and
research and development in Islamic finance.
Our close relationship with the industry gives
us the opportunity to share knowledge and
resources. We also enjoy a strong network
with local and international authorities and
financial institutions. Having assisted
numerous governments, financial institutions,
and other organisations in this arena, we are
driven to serve the need for further
enhancement and development of the industry
in years to come.
Issue #24 7
TOWARDS AN INFORMED MARKET
ISLAMIC FINANCING - TAX CONSIDERATION
Going For Conventional or Islamic
Financing? – A Tax Consideration
Azura Othman
Islamic Financial Services Practice
PricewaterhouseCoopers Taxation Services
Introduction
A
s the economic gloom reaches
our shores, companies have
started bracing themselves for
turbulent times ahead. Nobody has been
spared from the crunch of rising costs,
salary cuts and cancelled order books.
However, life has to go on and businesses
have to face the challenging environment
by re-strategising their activities and cost
maintenance.
During challenging times like this, cost
will be an item that comes under the
microscope. As revenue starts dwindling,
managing costs will be the focus vis-à-vis
keeping businesses afloat. When
undertaking a financing activity for
projects, many considerations need to be
taken into account, i.e. mode of financing,
tenure, rate of financing, legal and
regulatory requirements, and incidental
costs, to name but a few. The economics
of the project must be sufficiently robust
to keep the project profitable in the face
of adverse conditions. Under the current
economic environment, the rule of thumb
is to go for financing facilities with the
least cost and minimum access time to
liquidity. While companies vigorously
embark on various cost-cutting measures,
the 25% of profits channeled towards tax
payments is often forgotten.
Islamic Finance Bulletin April - June 2009
PricewaterhouseCoopers Taxation Services
Tax is a hidden cost in any financing
structure. There is a need to ensure that in
assessing and adopting the financing
facilities of a company, its tax efficiency
is factored in to avoid any additional
leakage. As the economic crisis gets
deeper, however, such costs can be the
deciding factor. This is more so when
undertaking cross-border financing. The
tax jurisdiction of the other contracting
party needs to be considered as countries
typically apply withholding taxes on
dividends, interest payments,
management fees and royalties paid to
foreign entities. There are also tax treaties
between countries that may shelter
contracting parties from unfavourable tax
treatments. Where tax treaties provide
favourable withholding tax treatment to
the recipients in certain jurisdictions,
projects will have the incentive to raise
funds in that jurisdiction.
Ultimately, the aim is to design a
financing structure that complements the
efficiency of operating the company.
Inefficient structures would only add to
the cost of financing.
Issue #24 8
TOWARDS AN INFORMED MARKET
ISLAMIC FINANCING - TAX CONSIDERATION
Choice of Islamic and
Conventional Financing
Malaysia is blessed with a sound financial
system that has stood its ground, thanks
to good regulatory and supervisory
oversight. To a certain extent, it has
cushioned the effects of the sub-prime
credit crisis when, elsewhere in the world,
other notable financial institutions have
taken a tumble, only to be saved by
rescue packages. Malaysia has a dual
financial system, whereby the Islamic and
conventional financial systems operate in
parallel. Since the introduction of Islamic
finance in the 1980s, Malaysia has paved
its way towards becoming an
international Islamic financial centre.
Along with it have come incentives and
facilitative policies to spearhead the
growth of Islamic finance in Malaysia,
towards its goal of becoming an
international financial hub. A host of tax
incentives have been given to the players
and investors in Islamic finance in
Malaysia, covering the areas of Islamic
banking and takaful, capital markets and
human capital. Therefore, Malaysia offers
market participants a choice of either
conventional or Islamic finance.
When it comes to modes of financing,
originators also have the choice of going
for conventional or Islamic financing.
Many projects that have traditionally been
funded through more established sources
of financing now have the option of
Islamic financing. The existence of a
highly liquid pool of Islamic funds, and
with increasingly more demanding
investors, more Shariah-compliant
financing structures have helped to make
Islamic financing a viable mode of
financing that is comparable to its
conventional counterpart.
Islamic Finance Bulletin April - June 2009
PricewaterhouseCoopers Taxation Services
Tax Neutrality in Islamic
Finance Transactions
The law governing the taxation of
commercial transactions in Malaysia, i.e.
the Income Tax Act, 1967, (“the Act”),
had been enacted long before Islamic
finance became popular. As there is no
specific tax framework for Islamic
finance, Islamic commercial transactions
are subject to the same laws and
regulations that govern conventional
transactions. Islamic financing is
essentially a sale transaction. Because of
the underlying assets in Islamic finance
transactions, there will be tax issues due
to additional steps that need to be taken to
facilitate a Shariah-compliant transaction.
In recognition of this, tax neutrality has
been provided in Malaysia.
The elements of tax neutrality in
Malaysia include the following:
ƒ Profits in Islamic transactions are
treated the same way as interest in a
conventional transaction, which
essentially means:
- Profits associated with Islamic
finance will be taxable, just like
interest income under
conventional financing.
- Profits will be deductible if the
funding has been used to generate
business income or to purchase
assets to generate income.
- All other tax rules relating to
“interest”, such as withholding
tax on interest and interest
exemption, will apply equally to
profits.
Issue #24 9
TOWARDS AN INFORMED MARKET
ISLAMIC FINANCING - TAX CONSIDERATION
ƒ Disposal of assets to facilitate an
Islamic transaction is ignored for tax
purposes.
ƒ Stamp-duty exemption is given on the
purchase of a property by a financier,
for the purpose of resale under the
principles of Shariah.
ƒ A Musharakah transaction is treated
as a financing arrangement, and there
is no requirement to file a partnership
tax return.
With the tax-neutrality provisions,
Islamic and conventional transactions are
placed on a level playing field. The next
question, then, is whether one is better
than the other in the context of taxation.
The general rule of taxation is that
income within the Act’s scope of taxation
is taxable on the recipient, and any
expense expended wholly and exclusively
to derive that income is given tax
deduction when arriving at the income
chargeable to tax. The tax authorities
make a distinction between costs incurred
in the production of income and costs
incurred for the production of income.
The latter is seen as costs incurred to put
taxpayers in a position to derive income
and, as such, is not treated as deductible
for tax purposes; cost of financing is
generally seen as such. While interest
expenses on financing are given tax
deduction if incurred to derive the income
of the taxpayers, expenses related to
obtaining such financing are not.
Examples of such expenses are legal fees
and stamp duties on loan documents,
consultancy and syndication fees, and
rating fees for securities issuance. Such
expenses can form a major portion of the
cost of financing; if tax deduction is not
available, the financing is not cost
efficient.
Islamic Finance Bulletin April - June 2009
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Direct Financing Through
Issuance of Sukuk
Take, for example, financing through the
issuance of sukuk or Islamic securities.
To encourage the growth of Islamic
finance and to promote Malaysia as an
international Islamic financial centre (or
MIFC), various tax incentives covering
issuers, investors and corporate advisors
have been introduced to promote the
issuance of Islamic securities out of
Malaysia, especially in foreign currencies
to attract international players to the
country.
Issuers
The incidental costs incurred in issuing a
sukuk can be quite substantial, such as
legal and consultancy fees, trustee fees,
rating and surveillance fees. Such
expenses are not given tax deductions
because they are incurred as a means for
the issuer to commence its project.
However, if the financing is raised in
accordance with the principles of
Shariah, specific deductions have been
given through the following Gazette
Orders:
ƒ Income Tax (Deduction for
Expenditure on Issuance of Islamic
Securities) Rules 2007 provide tax
deduction of an amount equal to the
expenditure incurred on the issuance
of Islamic securities, approved by the
Securities Commission (established
under the Securities Commission Act
1993) pursuant to the principle of
Mudharabah, Musharakah, Ijarah
and Istisna’; or any other principle in
accordance with the Shariah principle
approved by the Minister until year of
assessment 2010.
Issue #24 10
TOWARDS AN INFORMED MARKET
ISLAMIC FINANCING - TAX CONSIDERATION
ƒ Income Tax (Deduction on the Cost
of Issuance of the Islamic Securities)
Rules 2007 provide tax deduction of
an amount equivalent to the cost of
issuance of the Islamic securities
incurred by the special-purpose
company.
ƒ Stamp-duty exemption under the
Stamp Act is given on issuance of
securities approved by the Securities
Commission.
ƒ Stamp-duty exemption on
instruments executed pertaining to
Islamic securities issued in all types
of currencies, as approved by the
Securities Commission under the
MIFC guidelines until 31 December
2016.
The incentives given would make issuing
Islamic securities relatively cheaper than
conventional securities.
Special-Purpose Vehicle
A special-purpose vehicle (“SPV”)
established to facilitate an Islamic
financing transaction would normally
serve as a “flow-through” vehicle.
However, the SPV is still regarded as a
separate entity which has to comply with
all the administrative requirements of
Malaysian tax legislation. To facilitate the
structuring of Islamic securities, Section
60I of the Act exempts SPVs established
solely for the purpose of facilitating
Islamic financing transactions from
income tax; they are not required to
comply with the administrative
requirements under the Act, such as filing
of tax returns, tax estimates and
instalment payments. The income and
expenses of the SPV are instead
accounted for by the company that
establishes it.
Islamic Finance Bulletin April - June 2009
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This incentive enables SPVs created
purely for Islamic financing to be tax
neutral, which will ease the
administrative requirements of Islamic
financing transactions.
Investors
In addition to the above, investors of
Islamic securities are also given the
following tax exemptions:
ƒ Any persons, whether individuals or
companies, residents or non-residents
of Malaysia, are given tax exemption
on interest paid or credited in respect
of Islamic securities, other than
convertible loan stocks - approved by
the Securities Commission – that are
issued in currency other than ringgit.
ƒ Non-resident companies are given the
same tax exemption even for Islamic
securities or debentures, other than
convertible loan stocks - approved by
the Securities Commission – that are
issued in ringgit.
These incentives would attract local and
foreign investors into the Malaysian
capital markets and ensure that Islamic
securities remain competitive.
Corporate Advisors
With effect from year of assessment
2009, more tax incentives to make the
Malaysian capital markets more vibrant
have been introduced through the
following Gazette Orders:
ƒ Income Tax (Exemption) (No. 10)
Order 2008 provides tax exemption
on income derived from the regulated
activity of dealing in securities and
advising on corporate finance relating
to the arranging, underwriting and
Issue #24 11
TOWARDS AN INFORMED MARKET
ISLAMIC FINANCING - TAX CONSIDERATION
distributing of non-ringgit sukuk that
originates from Malaysia and are
issued or guaranteed by the
Government of Malaysia or approved
by the Securities Commission until
year of assessment 20111.
ƒ Income Tax (Exemption) (No. 9)
Order 2008 provides tax exemption
on income derived from the regulated
activity of dealing in non-ringgit
sukuk that originates from Malaysia
and are issued or guaranteed by the
Government of Malaysia or approved
by the Securities Commission until
year of assessment 20112.
Whenever Islamic securities are
distributed internationally, the provision
of tax neutrality and tax incentives would
resolve many tax issues and increase the
attractiveness of the securities to
investors. The incentives above are
intended to develop and strengthen
Malaysia’s position in the global sukuk
market, as a result of competition from
other financial centres. They are seen to
encourage advisors to promote the
issuance of Islamic securities, especially
non-ringgit sukuk, more aggressively.
The tax exemption on the income
received from dealing of such securities
would further enhance the issuance of
non-ringgit securities.
1
This is applicable to a holder of a Capital
Markets Services License who is a
registered person carrying on regulated
activity of advising on corporate finance
under Schedule 3 of the Capital Markets
and Services Act 2007 which is solely
incidental to the carrying on of its business
or the practice of his profession.
2
This is applicable to a holder of a Capital
Markets Services License who is a
registered person carrying on such dealing
through his proprietary account.
Islamic Finance Bulletin April - June 2009
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Others
To complement the growth of Islamic
finance, tax incentives are also given to
companies that set up Islamic
stockbroking companies that will carry
out the trading of Islamic securities.
Income Tax (Deduction on Expenditure
for Establishment of an Islamic Stock
Broking Business) Rules 2007 provide
tax deduction on expenditure incurred for
the establishment of an Islamic
stockbroking business, which otherwise
would not be eligible for tax deduction.
The expenditure that qualifies for tax
deduction in this case applies to
consultancy and legal fees, cost of
feasibility studies, cost of market
research, and cost of obtaining licence
and business approvals for the purpose of
establishing an Islamic stockbroking
business.
Through the granting of this incentive, the
Islamic stockbroking company can be a
one-stop centre for investors dealing in
Islamic securities, which can increase the
access and range of Islamic investments
through the availability of screened
Islamic securities. Investors trading
through an Islamic stockbroking company
can rest assured that all stocks traded are
Shariah-compliant.
The presence of global Islamic finance
experts, such as Shariah scholars, in
advising on Islamic finance transactions
will help develop the Islamic financial
instruments that are marketable
internationally, and encourage product
innovation as well as the convergence of
Shariah opinions.
Issue #24 12
TOWARDS AN INFORMED MARKET
ISLAMIC
C FINANCING
G - TAX CONSIDERATION
N

As suchh, Income Taax (Exemption) (No. 3) Order 2008 provides witthholding-tax x exemptionn
on consultancy feees received byb non-resid dent experts, on consultaancy services in Islamic
financee. Such experrts would havve to be veriffied by the MIFC
M Secretaariat.

The taxx advantages of opting foor Islamic cap

pital-market financing caan be encapsu
ulated in the
following illustratioon:

Indireect Financcing Throough Finan

ncial Interrmediariees
For eveery conventioonal financiaal product cu urrently offerred in the m
market, there is almost an
equivallent Islamic alternative. The
T financin ng rates offerred by the Isslamic and conventional
c
optionss are also coompetitive, such that bo orrowers maay be indiffe ferent to them, save forr
fulfillinng religious injunctions. Generally, most Islamiic financing products in n the markett
require the existencce of underlyying assets or o transactions. This couuld involve the
t financierr
purchassing propertyy for resale too a borrowerr, who will thhen repay thee financier over
o the term
m
of the financing.
f Thhis could result in tax isssues such as double stam mp duty on thhe financing,
and upffront taxation due to thee claw-back of o tax deprecciation or caapital allowaance claimedd
on the asset. Thereefore, tax neuutrality has been provided to Islamiic financing transactions
such it does not haveh to pay any more taax or duty than t does a conventionaal financing
transacttion.

Islamicc Finance Bulletin Ap pril - June 20

009 Issue
e #24 13
Pricewa
aterhouseCoo
opers Taxatio
on Services
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ISLAMIC FINANCING - TAX CONSIDERATION

Currently, stamp-duty exemption under Verdict

the Stamp Act is given to instruments
executed pursuant to a scheme of
financing approved by the Central Bank
or the Securities Commission as a scheme
that is in accordance with the principles
of Shariah. In addition, the following tax
exemption is given:
ƒ Stamp Duty (Remission) (No.2)
Order 2007 provides for an additional
20% stamp-duty exemption on the
principal or primary instruments used
in Islamic financing products
approved by the Shariah Advisory
Council of the Central Bank or the
Securities Commission up to 31
December 2009.
Therefore, Islamic financing transactions
will incur 20% less stamp duty compared
to conventional financing instruments.
The stamp-duty remission is applicable to
Islamic financing obtained from Islamic
financial institutions, and is not relevant
to Islamic securities issued out of
Malaysia that do not incur any stamp
duty, as highlighted above.
With the various tax incentives given to a
wide spectrum of the Islamic financial
system to spearhead the growth of Islamic
finance, financing through the Islamic
route has a clear advantage in terms of tax
cost savings. However, some of the
incentives given are for a finite period;
unless there are further extensions on the
incentives, the line of advantage may be
blurred between Islamic and conventional
financing. Therefore, the participants in
Islamic finance have to really subscribe to
the values inscribed in Islamic finance,
which are based on the tenets of real
underlying economic activity and
promoting social equality and justice, in
order to sustain its continued viability and
edge over its conventional counterpart.

Even though there are no major

incentives here as given to financing
through issuing Islamic securities, Islamic
financing through financial institutions
still has an edge.

Islamic Finance Bulletin April - June 2009 Issue #24 14

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ISLAMIC FINANCING - TAX CONSIDERATION

PricewaterhouseCoopers Malaysia

As one of the leading and largest
professional services organisation,
PricewaterhouseCoopers Malaysia has over
100 directors and over 300 managers, out of
a staff strength of about 1,800 people. With
offices in 9 locations - Kuala Lumpur, Pulau
Pinang, Ipoh, Kuantan, Melaka, Johor Bahru,
Kota Kinabalu, Kuching and Labuan, we
work to deliver value to our clients.
We provide industry-focused assurance, tax
and advisory services for public and private
clients. Integrating their skills and diverse
knowledge, our professionals connect their
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public trust and enhance value for clients and
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We have played an integral part in the growth
and progress of Malaysia since 1900. Today,
PricewaterhouseCoopers continue to work
with many large multinationals, public sector
entities and Malaysian companies, providing
solutions to their complex business issues.
PricewaterhouseCoopers refers to the
individual members of the
PricewaterhouseCoopers organisation in
Malaysia each of which is a separate legal
entity or, as the context requires, other
member firms of PricewaterhouseCoopers
International Limited, each of which is a
separate and independent legal entity.

Our professional resources, experience,

tradition of independence and integrity,
commitment to the highest ethical standards,
together with our worldwide service
capabilities, give our clients the confidence to
work with PricewaterhouseCoopers.

Islamic Finance Bulletin April - June 2009 Issue #24 15

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FINANCIAL DERIVATIVES FROM ISLAMIC PERSPECTIVE
Financial Derivatives from Islamic
Perspective
Edib Smolo
International Shari’ah Academy for Islamic Finance
Introduction
I
nvestors and players in the financial
market are exposed to various types
of risk. Some of them are manageable
while others are not. Financial
derivatives, according to Sami al-
Suwailem, are financial instruments used
for trading risk. In his view, the purpose
of derivatives is to distribute risk among
the market players; if this distribution is
done correctly, then every market player
will be better off, leading to productivity
and efficiency. The key fact here is that
financial risk occurs naturally in a world
without derivatives, and derivatives could
be used to reduce, or hedge, that risk.
Financial derivatives can be used for
many purposes. In reality, however, they
are mostly used for just one of 3 basic
functions: hedging, arbitrage or
speculation. Hedgers use derivatives to
manage uncertainty, and speculators use
derivatives to bet on it. Hedgers use
derivatives to reduce financial risk, or the
prospect that the price of things might
“move against them.” On the other hand,
arbitrageurs and speculators use hedging
to take advantage of price differences in
the market and to make a profit from
simple speculation on the market moves,
respectively.
Is Hedging Desirable in Islam?
Derivatives are excellent tools of risk
management known as hedging.
Islamic Finance Bulletin April - June 2009
ISRA
Generally speaking, hedging involves
recognising and measuring the financial
risk of an existing position, then taking on
some new position with opposite
exposure characteristics such that the
gains and losses of the positions cancel
each other out. Simply, hedging can be
seen as insurance policy against
unexpected movements in the market.
In banking, finance, and treasury
operations, the objective of true hedging
is the reduction of risk that has been
assumed through trading and investment.
Therefore, the purpose of hedging is to
protect the value of a current or
anticipated cash market or off-balance-
sheet position from adverse changes in
interest rates. There is no doubt that Islam
calls for wealth protection; as such, any
exposure of wealth to unnecessary risk is
not desirable. With this in mind, it is
worth mentioning 2 legal maxims that
may be related to hedging:
a. “Harm must be eliminated” (Ad-
dararu yuzal)
b. “Hardship begets facility” (Al-
mashaqqatu tujlab at-taysir)
Therefore, hedging plays an important
role in preserving social well-being. By
hedging, the wealth of people (be they
investors, traders or simple individuals) is
protected from financial calamities and
losses. There are other benefits of
hedging, e.g. they enable businesses to
Issue #24 16
TOWARDS AN INFORMED MARKET
FINANCIAL DERIVATIVES FROM ISLAMIC PERSPECTIVE
plan better, leading to less price
fluctuations that will then reduce costs,
thus bringing further benefits to society.
Even arbitrage brings benefits to society
through the process of price realignment.
According to Obiyathullah, arbitrage
enhances the discovery process. He goes
further by saying that arbitrage helps
reduce the distortionary effects of
government regulation/intervention. Quite
contrary to hedging and arbitrage,
speculation hurts more than it helps. Due
to the increased volume of trading,
however, transaction costs will decrease
and there will be more liquidity.
Hedging vs Speculation
Due to pure management and lack of
proper due diligence by banks and
financial institutions, the conventional
financial system has fallen into the abyss
of a new great depression, accelerated by
the sub-prime mortgage crisis,
collateralised debt obligations (“CDOs”),
and credit-default swaps (“CDSs”). The
Islamic finance industry is not immune to
the current financial crisis. Luckily,
Islamic derivatives have not developed
very much in recent years; this
conservatism has saved this sector from
the disastrous effects of the current credit
crunch.
On one side, Islam seeks the protection of
wealth; on the other, it prohibits
speculation (maysir) and interest (riba).
These 2 (maysir and riba), fuelled by
greed and self-interest, had been the main
catalysts of the current global crisis.
A simple way to distinguish investors
from speculators is that the former risk
their own capital with the hope of making
profits from volatility in market prices.
By hedging, they seek to offset some
potential losses. On the other hand,
speculators typically use the capital of
Islamic Finance Bulletin April - June 2009
ISRA
others – often borrowed or trusted money
– and assume the risk that investors seek
to avoid. Like investors, speculators do
not want to lose their capital; in the
search for increasingly more profits,
however, they expose themselves to
greater risks. In fact, both investors and
speculators do everything possible to
minimise risk and maximise returns,
trying to enter the market at the right time
and the right price. Because they are
using their own money, investors are
more cautious.
Derivatives and the Current
Global Crisis
As mentioned earlier, the current global
turmoil had been fuelled by the sub-prime
mortgage crisis, collateralised debt
obligations (“CDOs”), and CDSs. To
understand how derivatives, such as those
mentioned above, are related to the global
financial crisis, we will look at the most
commonly used derivative instrument,
known as a credit-default swap or CDS.
A CDS is one of the most popularly used
credit derivatives; it allows the trading of
counterparty risk from one to another
without changing the ownership of an
underlying instrument. Investopedia
defines a CDS as “a swap designed to
transfer the credit exposure of fixed-
income products between parties.” Ilya I
Gikhman defines it as “an over-the-
counter (or OTC) bilateral financial
instrument used to hedge the default risk
of a risky debt instrument or a basket of
risky debt instruments.”
The debate is still on as to whether CDSs
had been responsible for the present
credit chaos. However, no one denies that
they played a major role, although they
may not be the primary reason for the
debacle. Initially these financial
instruments had been responsible for the
sub-prime lending fiasco, which led to the
Issue #24 17
TOWARDS AN INFORMED MARKET
FINANCIAL DERIVATIVES FROM ISLAMIC PERSPECTIVE

economic crisis in the United States and willing to take the risk of losing
eventually turned into a global crisis. everything; so he may decide to buy
insurance, just in case Company X goes
How Does a Credit-Default bankrupt (refer to Figure 1).
Swap Work?
He approaches Bank Z and asks if it is
willing to sell him insurance against
The answer to this question is quite
Company X’s bond. If the Bank Z thinks
straightforward. For example, Customer
it is worth the risk, it may insure it at, say,
A buys corporate bonds from Company
a 2% premium. Now, if the Customer A
X. Customer A believes that Company X
bought RM1 million worth of bonds, then
will make money and be able to pay him
he has to pay RM20,000/year to Bank Z
back with interest. Nevertheless, there is
for insurance against the bonds. However,
still some risk that the company will
if Company X goes bankrupt, then he can
default and the bonds will be worthless. If
still collect his RM1 million from Bank Z
Customer A invests a huge amount of the
(Figure 1).
money in this company, he may not be

Figure 1: Pure Hedging

 
1 3 Insurance
Investor / Company /
Company X
Customer A Bank Z
2 4

1. Investor/Customer A buys the corporate bonds for RM1 million.

2. Company X pays back principal amount plus interest to the Investor/Customer A.
3. Investor/Customer A buys insurance policy from Bank Z at 2% of the principal amount, i.e.
RM20,000.
4. In case Company X defaults, the Investor/Customer A will receive the full amount from Bank Z.

Up to this point, this swap arrangement
is no different from fire insurance on
someone’s house (i.e. you pay a
premium and if your house burns down,
then you collect your money from the
insurer). However, there is a difference.
Unlike fire insurance, Customer A does
not have to actually own the asset to
insure it. What does this mean? It means
that, as in the case of the example above,
if Customer A thinks Company X is
going down, he can buy insurance against
the latter’s bonds from Bank Z, even if he
does not actually own the bonds. This is
pure speculation, and Bank Z is no longer
insuring against real assets - it is offering
pieces of paper (derivatives) that could
cost it many times over the bonds’ value
(Figure 2).

Islamic Finance Bulletin April - June 2009 Issue #24 18

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TOWARDS AN INFORMED MARKET
FINANCIAL DERIVATIVES FROM ISLAMIC PERSPECTIVE

Figure 2: Pure Speculation

Company X

1 Insurance
Investor / Company /
Customer A Bank Z
2

1. Since there is no requirement to own the asset, the Investor/Customer A buys an insurance policy
from Bank Z, believing that Company X will go bankrupt.
2. In case Company X in fact goes bankrupt, Investor will receive the insured amount from Bank Z.

Now, the question may be raised: Why
is it a problem? Is not Bank Z supposed
to have a reserve to pay people if they
start making claims? Well, here lies part
of the problem. Since the CDS market is
completely unregulated and Bank Z is
not required to have a certain percentage
of reserves before offering insurance, the
payments, once they are due, may not be
made.
Things get more complicated or worse
because Bank Z not only sells the
insurance but is also out buying
insurance from other banks to mitigate
its own risks. This is the real problem in
the financial market. In other words, if
Customer A bought insurance against
Company X, he is counting on Bank Z
to pay up in the event of a default (i.e. he
is transferring his risk from Company X
to Bank Z). However, since Bank Z also
bought some insurance from Bank Y,
then Bank Z is counting on Bank Y to
pay up in case of default. Now, this
means that if Company X defaults on its
payments, Customer A will receive his
insured amount only if Bank Y pays that
amount to Bank Z, which would only
then pay it to Customer A.
Unfortunately, the buying and selling of
this insurance goes on and on until every
bank (investor, hedge fund, pension fund
or any other financial institution) is
somehow interdependent on every other
bank in the CDS market. It means that
almost all players in the CDS market are
caught in the CDS web; if Bank Z (or
Bank Y or any other bank) defaults on
its insurance, then Customer A will not
get his money.
However, this is not the end of the mess
since Customer A was probably selling
insurance as well. Since he was counting
on Bank Z’s money, he will not be able to
pay off his insurance either. So, this
problem amplifies until a vast number of
the banks in the CDS market are
completely wiped out. We also should not
forget that there is no underlying asset
that is worth anything because Customer
A did not have to own the bonds to obtain
insurance against them; they were simply
pieces of paper being bought and sold.

Islamic Finance Bulletin April - June 2009 Issue #24 19

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FINANCIAL DERIVATIVES FROM ISLAMIC PERSPECTIVE

The scenario given may be best depicted by the following 2 figures (Figure 3 and Figure 4).

Figure 3: Real CDS Market

 
1 3 Insurance
Company X Investor / Company /
Customer A Bank Z
2 4

S B B  S 

Bank Y Insurance A 

S B B  S 

Bank X Insurance B 

S B B  S 

Bank W Insurance C 

Where: B – buys insurance

S – sells insurance

Islamic Finance Bulletin April - June 2009 Issue #24 20

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FINANCIAL DERIVATIVES FROM ISLAMIC PERSPECTIVE

Figure 4: Real CDS Market (web)

 
1 3 Insurance
Company X Investor / Company /
Customer A Bank Z
2 4

S B B  S 

Bank Y  Insurance A 

S B B  S 

Bank X Insurance B 

S B B  S 

Bank W Insurance C 

Where: B – buys insurance

S – sells insurance

Islamic Finance Bulletin April - June 2009 Issue #24 21

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FINANCIAL DERIVATIVES FROM ISLAMIC CONTRACTS
The Problems Faced by the
Derivatives Market
The derivatives market is far from
perfect. Derivatives have been described
as evil, acts of Satan, time bombs and
weapons of mass destruction. For
example, Warren Buffett describes
derivatives as both "financial weapons of
mass destruction" and “time bombs”. In
his Berkshire Hathaway letters to
shareholders, he said, "Unless derivatives
contracts are collateralised or guaranteed,
their ultimate value also depends on the
creditworthiness of the counterparties to
them. In the meantime, though, before a
contract is settled, the counterparties
record profits and losses – often huge in
amount – in their current earnings
statements without so much as a penny
changing hands. The range of derivatives
contracts is limited only by the
imagination of man (or sometimes, so it
seems madmen).” From the above, the
problems may be deduced and listed
down as follows:
1. No Regulation – It is obvious that the
CDS contracts are carried over-the-
counter and there are no rules and
regulations governing them. The
transactions are simply done over the
phone or through e-mail. Due to their
huge presence in the market and their
influence on the stability of not only
the American financial system but
also the global one, the CDS market
has to be regulated and monitored. If
there had been regulation in place,
then someone would have known that
these types of transaction were a
crisis waiting to happen; they could
have intervened and taken the
necessary actions to stop future
transactions from taking place.
Islamic Finance Bulletin April - June 2009
ISRA
2. No Reserve Requirement – So far, the
players in the CDS market have not
had to have any reserves with regard
to the insured amounts. This implies
that in the event of default, the
protected seller has no money at hand
to cover the losses. The problem goes
on through the domino effect, causing
financial chaos all over the place.
Had these types of derivatives been
regulated, then the governing body
would have made sure that the
protected seller had sufficient
reserves at hand to cover the losses. If
the reserve requirement ever dipped
below the required amount, the
regulatory body would have stepped
in to rectify the process.
3. No Underlying Asset – As an
investor, I do not have to posses the
asset in order to purchase insurance.
CDSs resemble an insurance policy,
as they can be used by debt owners to
hedge or insure against a default on a
debt. However, because there is no
requirement to actually own any asset
or suffer a loss, CDSs can also be
used, and are used, for speculative
purposes.
4. No Transparency – Since this market
is unregulated, no one knows how
much CDS is out there, or who is
who in that market (i.e. who is the
seller and who is the buyer of the
protection). According to
International Swaps and Derivatives
Association, the notional amount
outstanding of CDS decreased by
12% in the first six months of 2008 to
USD54.6 trillion from USD62.2
trillion. This means that there are still
some USD50 trillion of CDS out
there, somewhere, in the market.
Issue #24 22
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FINANCIAL DERIVATIVES FROM ISLAMIC CONTRACTS

Conclusion
From the discussion above, it is clear that
true hedging aims at neutralising or
minimising the risks involved in financial
activities. As such, it falls under the
umbrella of the objectives of Shari’ah and
is desirable. However, Islamic finance
should learn the lessons from the current
global crisis and establish a system of
rules and regulations that will serve the
maslaha (public good) in general. This
system should be subject to regulation
and overview by a special body, with
authority to interfere when necessary.
Underlying assets should be attached to
the trading activities, and these trades
should be limited to the original buyers
and sellers to avoid the speculative
appetite of market gamblers. The sellers
of hedge instruments should be
specialised institutions that are subject to
the required reserves. Furthermore, the
activities of derivatives market players
should be transparent, and the data should
be available for tracking. Although these
steps may hamper the derivatives market
and reduce its volume, they will protect
players in from future volatilities, as well
as provide a more stable and more
sustainable system that is less vulnerable
to the greed and thirst of market
speculators and gamblers.

Islamic Finance Bulletin April - June 2009 Issue #24 23

ISRA
TOWARDS AN INFORMED MARKET
FINANCIAL DERIVATIVES FROM ISLAMIC CONTRACTS
The author, Edib Smolo, is an associate
researcher in the Islamic Banking Unit,
International Shari’ah Research Academy
(ISRA) for Islamic Finance. He obtained his
undergraduate double-degree in Economics
and Islamic Revealed Knowledge with Honors
as well as Master in Economics from
International Islamic University Malaysia
(IIUM), Malaysia.
Prior to joining ISRA, Edib worked for an
insurance company in Bosnia and Herzegovina
and at the same time he was Assistant
Professor at Faculty of Economics, Sarajevo
School of Science. He participates in
conferences and seminars related to
economics, business and finance. He published
several papers on Islamic microcrediting,
economics, and finance. His interests are in
Islamic banking and finance, microcrediting,
and Islamic capital market products, among
others.
For more information, please contact:
International Shari’ah Research Academy
for Islamic Finance
2nd Floor, Annexe Block
Menara Tun Razak
Jalan Raja Laut
59350 Kuala Lumpur
Malaysia
Tel: +603 2781 4000
Fax: +603 2692 4094
Website: www.isra.my
Islamic Finance Bulletin April - June 2009
ISRA
INTERNATIONAL SHARI’AH
RESEARCH ACADEMY FOR ISLAMIC
FINANCE
The establishment of the International
Shari’ah Research Academy for Islamic
Finance or more commonly known by its
acronym, ISRA, is to promote applied
research in the area of Shari’ah and Islamic
finance.
It will also act as a repository of knowledge
for Shari’ah views or fatwas and undertake
studies on contemporary issues in Islamic
financial industry. ISRA will contribute
towards strengthening human capital
development in the areas of Shari’ah and
provide platform for greater engagement
amongst practitioners, scholars, regulators,
academicians via research and dialogues,
both in the domestic and international
environment. Through pioneering research
and rigorous intellectual dialogue, ISRA aims
to promote innovation and dynamism into new
boundaries of Islamic finance. It is envisioned
that with greater research and dialogues,
mutual respect and recognition would emerge
within Islamic financial industry global
community.
As a part of the International Centre for
Education in Islamic Finance (INCEIF), ISRA
is able to leverage on the existing
infrastructure and facilities as well as to tap
on the knowledge, expertise and resources of
the academic faculty and post graduate
students in INCEIF. To provide input and
assistance in the strategic direction of ISRA’s
research works, the Council of Scholars, a
group comprising of eminent local and
international Shari’ah scholars, has been set-
up.
Issue #24 24
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
Risks Associated with Islamic Financial
Contracts:
Part 6 (Final)
Meor Amri Meor Ayob
Bond Pricing Agency Malaysia Sdn Bhd
Introduction
A
s highlighted in the previous
parts (please refer to the series of
articles published in the previous
bulletins), to be a competent pricing
specialist, a strong foundation in risk
identification and assessment is a
prerequisite. From this understanding plus
an in-depth knowledge of financial
engineering, the fair valuation of any
financial asset can be done. This skill set
is not only relevant to the conventional
bond market alone, but also to the sukuk
market.
The purpose of this series of papers is to
provide some essential reading for anyone
who is serious about the science of sukuk
valuation. These papers are the basis for
the underlying valuation methodology for
Islamic financial assets, developed by
Bond Pricing Agency Malaysia Sdn Bhd
(“BPA Malaysia”).
This last and final part of a series of 6
commentaries will highlight, as
completely as possible, all the identifiable
risks associated with the Mudharabah
contract.
Islamic Finance Bulletin April - June 2009
BPAM
Types of risk associated with the
contract of Mudharabah
A typical Mudharabah contract can be
segmented into 3 transaction stages. Each
stage has its own unique risks. The
following sections detail the risks
identified for each stage of the contract.
1. Contract
The customer and the financial institution
or capital provider, as partners, can
establish a Mudharabah contract via the
execution of the following:
c. A memorandum of understanding (or
MOU), which is to be followed by the
execution of multiple Mudharabah
contracts; or
d. A Mudharabah contract
The MOU states the intended mode of
financing, i.e. a restricted or unrestricted
Mudharabah financing instrument, the
profit-allocation ratio and the type of
guarantee that will be presented by the
Mudharib (or entrepreneur) to cover
losses arising from negligence,
misconduct or breach of contract.
The contract is non-binding and can be
terminated unilaterally, except in the
following situations:
Issue #24 25
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
a. when the Mudharib has already
commenced the business; and/or
b. when the duration for which the
contract is to remain in operation has
been determined.
There are 2 types of Mudharabah:
a. Unrestricted Mudharabah
The capital provider allows the Mudharib
to manage funds without any restrictions.
The Mudharib is expected to utilise its
expertise and skills in managing the funds
in accordance with the investment
objectives of the capital provider.
b. Restricted Mudharabah
The capital provider allows the Mudharib
to manage funds, subject to certain
restrictions such as instrument type and
sectoral or country exposure.
The Mudharabah capital must be in the
form of cash or tangible assets that are
valued by experts. The capital cannot be
in the form of debt owned by the
Mudharib or another party to the capital
provider. The capital must be freely
accessible to the Mudharib/customer for
the Mudharabah contract to be valid. As
the Mudharib invests the Mudharabah
capital on a trust basis, it is not liable for
losses except in cases of misconduct,
negligence and breach of contract,
whereby the Mudharib becomes
accountable for the amount of the capital.
The profit-allocation ratio and its
calculation methodology must be clearly
stated. The profit ratio must be on the
basis of an agreed percentage of the
profit, and not in a lump sum or
percentage of the capital. However, the
Islamic Finance Bulletin April - June 2009
BPAM
lump-sum profit is allowed when both
parties agree (in the contract) to distribute
a lump-sum profit if it exceeds a certain
ceiling. The profit-allocation ratio should
be determined when the contract is
concluded, and the ratio can be changed
anytime.
The Mudharib cannot earn fees in
addition to the profit. Any fee to be
earned must be from activities that are not
by the customer’s part of the
Mudharabah operations, and must be
executed in a separate agreement. The
Mudharib is not allowed to make a loan,
gift or donation out of the Mudharabah
funds. The Mudharib is entitled to claim
travelling expenses based on standard
practice, or up to the amount allowed by
the capital provider.
Profit can only be claimed when the
Mudharabah operations are profitable.
Any loss must be compensated by the
profits of future operations. If the losses
are greater than profits at the time of
liquidation, the net loss must be deducted
from the capital, which is solely borne by
the capital provider. This is one of the
major risks to the capital provider. Loss-
making operations may require additional
capital injection, and expose the capital
provider to the risk of capital erosion and
the opportunity to reinvest in other types
of partnerships or investments.
If the Mudharib commingles their own
funds with the Mudharabah funds, the
profits earned from both funds must be
divided proportionately vis-a-vis the
amount of the 2 funds. The Mudharib
may also combine the Mudharabah funds
with Musharakah funds, or accept funds
from a third party on a Mudharabah
basis, subject to the capital provider’s
permission or by appointment.
Issue #24 26
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS

2. Early Termination

Termination can be done by either party

as it is a non-binding contract, when
Mudharabah funds have been exhausted
or have suffered losses, upon the death of
the Mudharib or the liquidation of the
Mudharib. The risk at this stage is
capital-recovery risk; the capital provider
may lose the invested capital when the
Mudharabah contract is terminated.

3. Maturity

Termination can be done by either party

as it is a non-binding contract, when
Mudharabah funds have been exhausted
or have suffered losses, upon the death of
the Mudharib or the liquidation of the
Mudharib. The risk at this stage is
capital-recovery risk; the capital provider
may lose the invested capital when the
Mudharabah contract is terminated.

Islamic Finance Bulletin April - June 2009 Issue #24 27

BPAM
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS

References

Ayob, Meor Amri Meor (May 1999). Rating Islamic Debt Securities: A Primer. RAM’s Special
Highlights. RAM

BNM (November 1999). The Central Bank and the Financial System in Malaysia - A Decade of
Change. BNM

BNM Annual Reports from 1996 to 2005. BNM

BNM’s website: www.bnm.gov.my

Bursa Malaysia (previously known as Kuala Lumpur Stock Exchange). Website:

www.bursamalaysia.com

Capital Market Masterplan (February 2001). Securities Commission

Ismail, Mohd Izazee (March 2002). Islamic Private Debt Securities: Issues & Challenges. RAM’s
Special Highlights. RAM

IFSB’s website: www.ifsb.org

Securities Commission (Malaysia) website: www.sc.com.my

Securities Commission’s Quarterly Bulletin of Malaysian Islamic Capital Market (May, August,
November 2006). Securities Commission

Islamic Finance Bulletin April - June 2009 Issue #24 28

BPAM
TOWARDS AN INFORMED MARKET
RISKS IN ISLAMIC CONTRACTS
The author, Meor Amri bin Meor Ayob, is the
Chief Executive Officer of Bond Pricing
Agency Malaysia Sdn Bhd (previously known
as Bondweb Malaysia Sdn Bhd). Meor has
over 16 years of professional work experience
as a regulator in Bank Negara Malaysia and
as a credit analyst with Rating Agency
Malaysia Berhad (now known as RAM
Holdings Berhad).
In RAM, his last position had been Head of
Financial Institutions Ratings. He has a wealth
of experience, especially oin the risk elements
of the bond market. He is also has vastly
experienced in the sukuk market.
For more information, please contact:
Bond Pricing Agency Malaysia Sdn Bhd
(formerly Bondweb Malaysia Sdn Bhd)
No. 17-8 & 19-8, The Boulevard
Mid Valley City
Lingkaran Syed Putra
59200 Kuala Lumpur
Malaysia
Tel: +603 2772 0899
Fax: +603 2772 0808
Website: www.bpam.com.my
Islamic Finance Bulletin April - June 2009
BPAM
BOND PRICING AGENCY MALAYSIA
SDN BHD (formerly known as BondWeb
Malaysia Sdn Bhd)
BPAM, as Bondweb Malaysia Sdn Bhd, was
incorporated on 27 September 2004 under the
Malaysian Companies Act 1965. It was
registered as a bond-pricing agency (“BPA”)
by the Securities Commission on 28 April 28
2006, and has met and exceeded the
requirements outlined in the Guideline on the
Registration of Bond Pricing Agencies.
On 15 September 2008, Bondweb Malaysia
Sdn Bhd changed its name to Bond Pricing
Agency Malaysia Sdn Bhd (or BPAM). This
coincides with BPAM’s aim of consolidating
its position as Malaysia’s pioneer bond-
pricing agency, and to further strengthen its
position by focusing on its core business -
evaluated bond pricing.
The bond-pricing agency is an initiative by
the Securities Commission of Malaysia to
boost the transparency and quality of price-
discovery mechanisms and valuation
practices in the Malaysian bond market.
BPAM was officially appointed Malaysia's
first bond-pricng sgency on 18 April 2006.
With this status, BPAM is recognised as one
of the official sources for evaluated prices on
ringgit bonds
Issue #24 29
TOWARDS AN INFORMED MARKET
SUKUK RATING
Sukuk Rating: General Approach, Criteria
and Methodology
RAM Rating Services Berhad
Introduction
A
sukuk rating is issue-specific.
RAM Ratings’ credit opinions
on sukuk are, likewise, issue-
specific; they essentially reflect our view
of the obligor’s willingness and capacity
to meet its financial commitments with
regard to a particular sukuk issue, a
certain class of financial obligation or a
specific funding programme (for
example, an MTN or CP programme) -
promptly and in accordance with the
terms of that specific commitment.
It is possible for different sukuk issues
from the same obligor to carry different
ratings as issue-specific ratings, by
nature, depend on the intrinsic risk profi
le of the respective sukuk issue, the legal
partiality of the obligation in the event of
restructuring, reorganisation, bankruptcy
or vis-à-vis other laws relating to
creditors’ rights, as well as any credit
enhancement or support for the sukuk
obligation, including the creditworthiness
of guarantors and terms of the guarantees.
Our sukuk ratings are based on both
qualitative and quantitative factors, and
are premised on expectations on the
obligor’s future credit profile rather than
its absolute level of historic or current
financial measures. In terms of priority
ranking of obligations, the contractual
commitments stipulated in the sukuk
Islamic Finance Bulletin April - June 2009
RAM Ratings
structure firmly render the transaction a
financial obligation — requiring the
obligor to treat the sukuk as it would its
other direct, unsecured financial
commitments, thus making it
indistinguishable in terms of payment
priority. In this instance, RAM Ratings
will equalise the sukuk rating with the
obligor’s general credit rating, also
referred to as a corporate credit rating
(“CCR”) or senior unsecured debt rating.
However, if the sukuk transaction
contains terms akin to those of a secured
debt structure, with priority of claim over
the obligor’s assets, the sukuk rating may
be notched up and rated above the
obligor’s CCR - depending on the type,
nature and characteristics of the security
and its value relative to the sukuk
obligation. Conversely, if the recovery
prospects of the sukuk are notably
inferior to those of the obligor’s other
debts, the sukuk rating is likely to be
notched down from the obligor’s CCR.
A sukuk obligation is deemed to be of a
lower rank or categorised as a junior
obligation if it is contractually
subordinated (that is, where the obligor
has both senior and subordinated
obligations), or if it is unsecured and
there is a considerable class of secured
Issue #24 30
TOWARDS AN INFORMED MARKET
SUKUK RATING
creditors positioned ahead of it (where the
obligor has both secured and unsecured
obligations), or if it is structurally
subordinated, where it is a debt at the
holding company’s level and the
operating subsidiaries have their own
financial commitments. Under such
circumstances, the junior sukuk will be
rated lower than the issuer’s CCR to
reflect its subordinated claim priority over
the obligor’s assets in the event of
liquidation or receivership. The concept
of notching is only meant to differentiate
recovery prospects, as a default is likely
to interrupt payments on all of the issuer’s
financial obligations.
Purchase Undertaking
The incorporation of a purchase
undertaking in a sukuk transaction is an
important rating factor, as it changes the
risk metrics of the transaction and
fundamentally shifts the credit-risk driver
to the entity providing the undertaking.
The purchase-undertaking agreement in
an Ijarah-based transaction, for instance,
embodies a contractual obligation from
the seller-lessee to repurchase the leased
assets from the issuer-lessor at the end of
the lease period; or, in the event of an
early termination, at an agreed price
typically amounting to the sum of
outstanding sukuk, by executing a
purchase (Bai’) contract.
RAM Ratings’ analytical framework for a
sukuk transaction that is backed by a
purchase obligation will centre on the
obligor’s capacity to meet its purchase
commitments. The terms and provisions
of the purchase-undertaking agreement
are also taken into account; this is to
Islamic Finance Bulletin April - June 2009
RAM Ratings
ascertain the issue of timeliness of
payment.
Emphasis is also placed on the relative
ranking of the purchase obligation from
the obligor vis-à-vis its other debts and
financial commitments. This is to
determine if the obligor’s financial
commitments under the purchase
agreement are similar to its obligations to,
and rank pari passu with, its other
liabilities. If that is established to be the
case, and assuming we are satisfied with
all the other terms of the transaction, then
the sukuk’s assigned rating will be
equivalent to the obligor’s CCR. This
differs from the rating of asset-backed
sukuk, where the assigned rating is not
dependent on the originator’s credit
standing.
In a typical transaction involving a
special-purpose vehicle (“SPV”) as the
issuer, it is also important to determine
whether the SPV serves any other
purpose besides acting as a conduit to
facilitate the flow of funds to the sukuk
investors. Any competing claim or
interference from third parties may
interrupt the smooth operation of the
underlying business, impair its cashflow
and undermine the issuer’s ability to
adequately meet its obligations to the
sukuk holders in a timely manner.
Similarly, if the transaction incorporates
an external enhancement — for example,
if the sukuk is wrapped by a guarantee
from a financial institution or enhanced
by way of a put option from a third party
— the assigned rating will normally
reflect the creditworthiness of the entity
or party providing the credit support. This
is due to the unconditional and
Issue #24 31
TOWARDS AN INFORMED MARKET
SUKUK RATING

irrevocable nature of the accompanying to indicate their relative standing within

guarantee backing the sukuk transaction. the respective brackets. A long-term
Shariah-compliance rating is accorded to a sukuk with an
initial maturity period exceeding 12
Our analytical task relating to sukuk months, such as MTNs and bonds.
transactions includes an examination of
Shariah-related issues, to the extent that it
is necessary to appreciate the contractual
terms, operations and mechanisms of the
underlying contract(s) supporting the
sukuk transaction to be rated, and also to
identify Shariah-related matters that may
have a credit impact or a bearing on the
risk profile of the sukuk. In this regard,
the evaluation of the Shariah-related
aspects and contracts forms an added
assessment factor to our analytical
framework for sukuk. As a matter of
practice, a declaration from Shariah
advisors or scholars ascertaining the
Shariah-compliant nature of the
transaction is ordinarily obtained prior to
the final assignation of a rating.

Our ratings are based on the compliance

of the terms and obligations of the sukuk
issue under applicable legal and
regulatory settings, and commercial codes
governing business and contractual
matters, as opposed to the jurisdiction of
the Shariah courts. As a matter of
practice, expert opinions ascertaining the
legal issues in respect of the transaction
will customarily be obtained.
Sukuk Rating Scale and
Definitions
RAM Ratings maintains 2 rating scales
for sukuk issues. Long-term sukuk ratings
range from the highest category of AAA
to the lowest, D. Ratings within the AA to
C categories may also include subscripts
RAM Ratings’ short-term sukuk ratings
are also graded into several categories,
ranging from P1, which denotes a very
high level of safety with regard to timely
settlement of short-term obligations, to D,
being the lowest. Short-term ratings are
accorded to sukuk with an initial maturity
period of 12 months or less, such as CPs,
note-issuance facilities or revolving
underwritten facilities. The assigned
rating relates to the programme designed
to sell these notes, and is based on the
facility limit.

Islamic Finance Bulletin April - June 2009 Issue #24 32

RAM Ratings
TOWARDS AN INFORMED MARKET
SUKUK RATING
In the event of a CP/MTN programme,
RAM Ratings will assign both short- and
long-term ratings. These ratings are inter-
related as they are founded on the
fundamental credit profile of the sukuk
obligor and based on the same analytical
framework. Long-term investment-grade
ratings of AAA to BBB3 generally
correspond to the short-term rating scale
of P1 to P3; non-investment-grade long-
term ratings of BB1 and below are
mapped against the short-term scale of
NP.
Where a long-term rating intersects with
2 possible equivalent short-term ratings,
the final assignation of the short-term
rating will depend on the overall credit
quality and strength within the long-term
rating category, as well as our assessment
of the obligor’s credit and liquidity
profiles in the near or intermediate term.
Liquidity considerations play an
important role in our evaluation of the
corresponding short-term rating.
This is an excerpt from the Malaysian Sukuk Market Handbook - Your Guide to the
Malaysian Capital Market.
Islamic Finance Bulletin April - June 2009
RAM Ratings
Premised on the Shariah conditions
governing contracts of exchange,
including contracts of sale, the ratings
assigned by RAM Ratings to debt-
oriented and Ijarah-based sukuk reflect
our opinion on the issuer’s capacity and
willingness to meet its financial
commitments in a full and timely manner,
in accordance with the terms of the
underlying Islamic contract.
In contrast, given the nature of
partnership-based sukuk and recognising
the Shariah stipulations on risk-reward
sharing, the ratings assigned by RAM
Ratings to Musharakah and Mudharabah
sukuk reflect our opinion on the capacity
and willingness of the issuer to meet the
payment of capital and expected returns
on a full and timely basis, in accordance
with the terms of the investment contract.
Issue #24 33
TOWARDS AN INFORMED MARKET
SUKUK RATING

RAM RATING SERVICES BERHAD

(“RAM Ratings”)
For more information, please contact:
Incorporated in 1990 as the pioneer in the
provision of credit-rating services for the
Malaysian capital market, RAM Ratings’
portfolio encompasses a vast range of local
and foreign corporates, multinationals, banks,
insurance companies, government-linked and
other public-financed entities, myriad
RAM Rating Services Berhad (763588-T) complex investment vehicles and the ringgit-
denominated securities they issue, structured-
Suite 20.01, Level 20 finance transactions backed by receivables or
The Gardens South Tower other financial assets, and Islamic securities
Mid Valley City (commonly known as sukuk).
Lingkaran Syed Putra
59200 Kuala Lumpur As one of the region’s most experienced
Malaysia rating agencies, RAM Ratings plays a leading
role in providing crucial and independent
Tel: +603 7628 1000 credit opinions that are sought after by
Fax: +603 7620 8251 investors and other market participants, with
Website: www.ram.com.my a view to being more confident about their
investment and financial decisions.
Underscored by its renown in the rating
business, RAM Ratings’ credit assessments
have been habitually used as points of
reference by regulators, the financial
community and the investment fraternity.

RAM Ratings is a public limited company and

is wholly owned by RAM Holdings Berhad. Its
ultimate shareholders comprise major
financial institutions in Malaysia, Asian
Development Bank and Fitch Ratings.

Islamic Finance Bulletin April - June 2009 Issue #24 34

RAM Ratings
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market
         
Malaysian Rated Corporate Sukuk Market  
League Table of Lead Managers as at 30 June 2009 
 
    RM Million  %   
       
  CIMB Investment Bank Berhad       11,667   41.7% 
  AmInvestment Bank Berhad        7,200   25.7% 
  RHB Investment Bank Berhad        3,451   12.3% 
  MIMB Investment Bank Berhad        2,140   7.6% 
  Public Investment Bank Berhad        1,667   6.0% 
  Maybank Investment Bank Berhad           700   2.5% 
  OCBC Bank (Malaysia) Berhad           400   1.4% 
  OSK Investment Bank Berhad           400   1.4% 
  MIDF Amanah Investment Bank Berhad           350   1.3% 
     
    27,975  100%  
   
The value of consortium issues have been equally divided by the number of lead managers of a consortium 
 
Source : RAM Ratings/ FAST 
     

Islamic Finance Bulletin April - June 2009 Issue #24 35

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market

Islamic Finance Bulletin April - June 2009 Issue #24 36

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Malaysian Islamic
Capital Market

Islamic Finance Bulletin April - June 2009 Issue #24 37

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET
T STATISTIC
CS

Malaysiian IIslam
M mic
Capi
C ital Marrkett

c Finance Bulletin
Islamic Ap
pril - June 20
009 Issue
e #24 38
Market Statistics
TOWARDS AN INFORMED MARKET
MARKET STATISTICS

Sukuk Rated by RAM

Ratings

Islamic Finance Bulletin April - June 2009 Issue #24 39

Market Statistics
TOWARDS AN INFORMED MARKET
MARKET
T STATISTIC
CS

Malaysiian IIslam
M mic
Baankiing Marrkett

c Finance Bulletin
Islamic Ap
pril - June 20
009 Issue
e #24 40
Market Statistics
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
Sukuk - Total Traded Amount for the Quarter ended 30 June 2009

Sukuk - Total Sukuk Outstanding (RM mil) by Class: 30 June 2009

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 41
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
Sukuk New Facilities created for the Quarter ended 30-June-2009
Maturity
Facility Code Facility Name Instrument Facility Limit
Date

DANGA RM10.0B ISLAMIC

200900021 MTN 24-Apr-34 10,000,000,000
SECURITIES PROGRAMME
200900028 TIA RM5.0B IMTN MTN 27-May-39 5,000,000,000
PUTRAJAYA RM1.5B SUKUK
200900020 MTN 22-Apr-33 1,500,000,000
MUSYARAKAH MTN
SEAFIELD RM1.50B IMTN
200900025 MTN 25-May-29 1,500,000,000
PROGRAMME
200900024 THP 10-YR RM200.0 MILLION MMTN MTN 10-Dec-18 200,000,000

200900038 TALAM CORP BAIDS RM134.2 MIL BONDS 28-Jun-19 134,213,337

DAWAMA RM120.0M SENIOR
200900023 SUKUK MUSYARAKAH MTN MTN 26-Apr-13 120,000,000
PROGRAMME
DAWAMA RM20.0M JUNIOR SUKUK
200900022 MTN 25-Apr-14 20,000,000
MUSYARAKAH MTN PROGRAMME

Top 10 Sukuk Tender Result for the Quarter ending 30-June-2009

Issue Maturity Actual Successful Successful

Stock Name Date Date Issue Yield Price

PROFIT-BASED GII 3/2009 30.12.2014 30-Jun-09 30-Dec-14 4500 3.902 100.002

PROFIT-BASED GII 2/2009 13.04.2012 13-Apr-09 13-Apr-12 4000 3.077 100.000

BNMN-IDB 94/2009 68D 01.09.2009 25-Jun-09 1-Sep-09 200 1.941 99.640

BNMN-IDB 93/2009 49D 11.08.2009 23-Jun-09 11-Aug-09 200 1.925 99.742

BNMN-IDB 91/2009 49D 06.08.2009 18-Jun-09 6-Aug-09 200 1.926 99.742

BNMN-IDB 92/2009 70D 27.08.2009 18-Jun-09 27-Aug-09 200 1.926 99.632

BNMN-IDB 89/2009 49D 04.08.2009 16-Jun-09 4-Aug-09 200 1.941 99.740

BNMN-IDB 90/2009 70D 25.08.2009 16-Jun-09 25-Aug-09 200 1.938 99.630

BNMN-IDB 87/2009 56D 06.08.2009 11-Jun-09 6-Aug-09 200 1.948 99.702

BNMN-IDB 88/2009 70D 20.08.2009 11-Jun-09 20-Aug-09 200 1.947 99.628

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 42
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
10 Most Active Bonds Traded between 01-Apr-2009 and 30-June-2009
STOCK NAME LAST TRADED LAST TRADED TOTAL
PRICE YIELD/DISCOUNT VOLUME
TRADED LAST
QTR

PROFIT-BASED GII 2/2009 13.04.2012 100.31 2.96 5017

PROFIT-BASED GII 2/2008 30.06.2011 103.24 2.68 2459

PROFIT-BASED GII 2/2006 14.07.2011 103.86 2.68 1326

PROFIT-BASED GII 3/2009 30.12.2014 99.80 3.94 1217

PROFIT-BASED GII 1/2007 15.03.2010 100.97 2.21 872

RANTAU IMTN 15.03.2011-MTN 1 101.89 3.25 822

PROFIT- BASED GII 3/2008 14.02.2014 101.81 3.84 625

TIA IMTN T4 27.05.2039 100.45 5.72 600

BNMN-IDB 33/2009 91D 09.06.2009 99.86 1.82 575

BNMN-IDB 53/2009 63D 16.06.2009 99.82 1.84 510

YTM Curves as at 30 June 2009

LT Islm- LT Islm- LT Islm-

LT Islm-
Tenure Quasi Gov- Corporate- Corporate-
Gov-GII
Khazanah AAA AA2

3m 1.84 1.97 2.66 3.29

6m 1.87 2.00 2.76 3.42
1y 1.99 2.08 3.14 3.88
2y 2.42 2.55 3.54 4.31
3y 3.06 3.06 3.95 4.75
5y 3.87 4.14 4.57 5.41
7y 4.06 4.35 5.00 5.88
10y 4.34 4.67 5.46 6.38
15y 4.70 5.03 5.88 6.84
20y 5.06 5.39 6.30 7.30

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 43
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
TOWARDS AN INFORMED MARKET
RINGGIT SUKUK MARKET REPORT

Ringgit Sukuk
Market Report
5-YEAR YTM Historical Chart (weekly closing, last 6 months)

YTM Spread (5-YEAR GII) as at 30 June 2009

YTM Matrix – Item Spread
Principle: Islamic
Date: 30 June 2009

Class1 Class2 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y 20Y

Government GII 1.84 1.87 1.99 2.42 3.06 3.87 4.06 4.34 4.70 5.06

Quasi
Khazanah 0.13 0.13 0.09 0.13 0.00 0.27 0.29 0.33 0.33 0.33
Government

Corporate AAA 0.82 0.89 1.15 1.12 0.89 0.70 0.94 1.12 1.18 1.24

Corporate AA2 1.72 1.78 2.04 2.11 2.11 1.69 1.96 2.21 2.41 2.62

Information on this page is intended solely for the purpose of providing general information on the Ringgit Bond market and is not intended for
trading purposes. None of the information constitutes a solicitation, offer, opinion, or recommendation by Bond Pricing Agency Malaysia Sdn Bhd 44
(formerly Bondweb Malaysia Sdn Bhd) (“BPAM”) to buy or sell any security, or to provide legal, tax, accounting, or investment advice or services
regarding the profitability or suitability of any security or investment. Investors are advised to consult their professional investment advisors before
making any investment decision. Materials provided on this page are provided on an "as is" basis, and while care has been taken to ensure the
accuracy and reliability of the information provided in this page, BPAM provides no warranties or representations of any kind, either express or
implied, including, but not limited to, warranties of title or implied warranties of fitness for a particular purpose, accuracy, correctness, non-
infringement, timeliness, completeness, or that the information is always up-to-date.
Malaysian Sukuk Market Handbook 
Your Guide to the Malaysian Islamic Capital Market 
 
 
ISBN: 978‐983‐44255‐0‐0  

Published by RAM Rating Services Berhad 

As a pioneer in the Islamic finance industry, Malaysia has been setting benchmarks while 
assuming  a  pivotal  role  on  the  sukuk  pitch.  The  nation’s  Islamic  capital  market  has  been 
experiencing exponential growth, and we are well poised as the world’s most competitive 
and attractive sukuk market, underscoring Malaysia’s significance as the largest and most 
innovative global sukuk marketplace.  

The Malaysian Sukuk Market Handbook, published by RAM Rating Services Berhad (“RAM 
Ratings”),  is  a  comprehensive  guide  that  serves  as  a  practical  tome  for  institutions  and 
professionals keen on unlocking maximum value from the domestic Islamic capital market. 
The  contributors  to  this  handbook  are  eminent  personalities  from  various  backgrounds, 
well known in their respective fields of expertise. This handbook – the first of its kind ‐ also 
strives to broaden the sukuk investor and issuer bases, and covers inter alia the applicable 
Shariah principles, the Malaysian regulatory framework, the role of Shariah advisers, legal 
and  tax  considerations,  rating  approaches,  market  infrastructure  and  details  of  hallmark 
sukuk transactions. 

RAM  Ratings,  a  leading  credit‐rating  agency  in  Asia,  was  incorporated  in  1990  as  the 
pioneer  of  the  Malaysian  capital  market  in  this  sphere.  In  sukuk  transactions,  our  task 
involves  both  quantitative  and  qualitative  analysis  vis‐à‐vis  evaluating  the  financial 
strength  of  obligor  institutions  with  such  underlying  structures,  as  approved  by  Shariah 
scholars. RAM Ratings’ portfolio encompasses a vast range of local and foreign corporates, 
multinationals,  Islamic  and  conventional  banks,  takaful  and  insurance  companies, 
government‐linked and other public‐financed entities, myriad complex investment vehicles 
and the ringgit‐denominated securities they issue, structured‐finance transactions backed 
by  receivables  or  other  financial  assets,  and  sukuk.  As  one  of  the  region’s  most 
experienced  rating  agencies,  RAM  Ratings  is  a  leader  in  the  provision  of  crucial  and 
independent credit opinions that are sought after by market participants as regards their 
investment and financial decisions.  

For  further  enquiries,  kindly  contact  Ms  Noor  Maliana  Mansor  at  +603‐76281029  or 
maliana@ram.com.my.  

 
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