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    The Securities Commission of Malaysia does not represent nor warrant the completeness,

    accuracy, timeliness or adequacy of this material andit should not be relied on as such. The Securities

    Commission of Malaysia does not accept nor assumes any responsibility or liability whatsoever for

    any data, views, errors or omissions that may be contained in this material nor for any

    consequences or results obtained from the use of this information.

  • Contents1 Enhancing Market


    SHARIAH SECTION2 Kafalah on Mudharabah


    REGULATORY SECTION5 Understanding the Shariah

    Framework for IslamicBonds (Sukuk) in Malaysia

    PRODUCT DEVELOPMENT8 Islamic Real Estate

    Investment Trusts8 Single Stock Futures9 Shariah-based Unit Trust


    FEATURES10 Promoting Disclosure,

    Transparency and Governance16 Practical Aspects of Islamic

    Securitisation: A Market Primer20 Enhancing Capacity Building

    STATISTICAL UPDATES22 Malaysian ICM Q2 2006

    The availability and accessibility of comprehensive

    information, such as market statistics, updates on

    product development and regulatory issues are

    important for the further development of the Islamic

    capital market (ICM). International and domestic

    investors need to be well informed if Malaysia is to

    become a global Islamic financial hub.

    As such, the Securities Commission (SC) has produced

    this quarterly bulletin, the Malaysian ICM, which was

    launched by the Deputy Prime Minister of Malaysia,

    Dato Seri Najib Tun Razak, on 10 May 2006, in

    conjunction with the Malaysia International Halal

    Showcase (MIHAS) 2006. MIHAS 2006 was held from

    1014 May in Kuala Lumpur, Malaysia.

    Through the bulletin, the SC aims to raise the

    international profile of the Malaysian ICM and create a

    greater awareness and understanding of ICM matters

    among domestic and international market participants.

    The bulletin features the latest news and covers a range

    of issues, showcasing innovative ICM products and

    services, and sets out available opportunities in Malaysia.

    page 4

    AUGUST 2006 VOL 1 NO 2


    Quarterly Bulletin ofMalaysian Islamic Capital Market

    by the Securities Commission

    Suruhanjaya SekuritiSecurities Commission

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    AUGUST 2006 VOL 1 NO 2 ICMmalaysian


    The introduction of kafalah principles in capital market

    transactions has raised various Shariah arguments.

    Among the hotly debated issues was whether the usage

    of kafalah on mudharabah capital is permissible.

    Kafalah literally means guarantee. It is defined as a

    contract which combines ones zimmah (liability) with

    another persons zimmah.

    It is a contractual guarantee given by the guarantor

    to assume the responsibilities and obligations of the

    party being guaranteed on any claims arising thereof.

    This principle is also applied in loan guarantees,

    whereby the guarantor assumes the liability of the

    debtor when the debtor fails to discharge his

    obligation. This is also known as dhaman.

    From a contractual perspective, kafalah is included in

    the category of uqud tauthiqat (contractual guarantee).

    However, from the aspect of tabadul huquq (transfer

    of rights), it conveys the meaning of tabarru at the

    inception of the contract and mu`wadhat at the end.

    Generally, kafalah may be divided into two types:

    Kafalah bi mal is a guarantee to return an asset to

    its owner

    Kafalah bi nafs is a guarantee to bring someone to

    specific authority such as the judiciary.

    Kafalah bi mal can further be classified into three main

    categories, as follows:

    Kafalah bi dayn is a guarantee for the repayment

    of another partys loan obligation. It means that

    when a debtor fails to meet his obligation to repay

    a loan, then the guarantor will assume this


    Kafalah bi ayn or kafalah bi taslim is a guarantee

    of payment of an item or a guarantee of delivery in

    a transaction. For example, in a sale and purchase

    contract, the guarantor agrees to guarantee the

    delivery of the item to be sold to the purchaser. In

    the event the seller fails to honour his obligation

    according to the agreement, the guarantor will be

    responsible for the delivery

    Kafalah bi darak is a guarantee that an asset is free

    from any encumbrances. This guarantee is used

    especially for transactions that involve the transfer

    of titles or rights to ensure that an asset is free from

    any encumbrances. For example, if A claims and is

    able to prove that the item bought by B belongs to

    A, then it will be the guarantors responsibility to

    ensure that B gets back the value of his purchase

    which has been paid to seller A.

    On the other hand, mudharabah is a contract

    which involves an agreement between two parties

    namely rabb al-mal (investor) who provides 100% of

    the fund, and mudharib (entrepreneur) who manages

    the project in accordance with Shariah principle as per

    their expertise. Any profit from this investment will be

    apportioned based on the agreed ratio at the inception

    of the agreement. However, in the case of losses, it will

    be wholly borne by the rabb al-mal.

    Arguments that support the permissibilityof kafalah on mudharabah capital

    The original law on guarantees formudharabah capital

    According to the arguments of past Islamic jurisprudence,

    the jurists were unanimous in their opinion that when

    losses occur in a mudharabah contract, the loss is to be

    S H A R I A H S E C T I O N

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    AUGUST 2006 VOL 1 NO 2 ICMmalaysian

    borne by the rabb al-mal and not the mudharib, as the

    latters status is only amin (trustee). However, if it can

    be proven that the loss was clearly due to mudharibs

    negligence or intentional act, then the mudharib is to

    make good the capital to the investor.

    Past Islamic jurists were unanimous in opinion that in a

    situation where a loss occurs on a mudharabah, a capital

    guarantee by the mudharib is not permissible. However,

    they had different opinions on the status of the contract.

    The Hanafi and Hanbali Mazhab were of the opinion

    that the contract is valid and the conditional guarantee

    is nullified. The Maliki and Syafii Mazhab, however,

    were of the opinion that the mudharabah contract is

    immediately nullified if there is such a guarantee.

    Contemporary Islamic jurists have made studies on the

    acceptable level of capital in mudharabah contracts that

    can be guaranteed according to the perspective of

    Islamic jurisprudence. The main issue of concern in

    relation to capital guarantee is whether the guarantee

    given will cause the mudharabah contract to be

    nullified since it violates the muqtadha `aqd (the main

    objective of a contract).

    They have submitted several solutions on mudharabah

    capital guarantee, including:

    Third-party guarantee based on tabarru` (voluntarily


    Third-party guarantee based on qardh (debts)

    Mudharib yudharib (the entrepreneur channels the

    investors capital to investing in a third party)

    Guarantee through special funds.

    Third-party guarantee based on tabarru`

    The OIC Fiqh Academy discussed on the matter of

    issuance of sanadat muqaradhah and summarised that

    the mudharib guarantee on capital and mudharabah

    profits are not permissible. However, the guarantee may

    be issued by a third party who has no connection

    whatsoever with the mudharib if it is done by way of

    tabarru` and is not included as a condition in the actual

    mudharabah contract sealed and signed by both


    The Shariah Council for Accounting and Auditing

    Organization for Islamic Institutions (AAOIFI) allowed

    for third-party guarantees other than by the mudharib

    or investment agent or business partner towards the

    liability of investment losses. However, this is on the

    provision that the guarantee given is not tied to the

    original mudharabah contract. The basis of their

    decision is tabarru` which is allowed by Shariah.

    Husain Hamid Hassan summarised the basis of the

    permissibility of third-party guarantee based on

    the views of Maliki Mazhab which allows wa`d mulzim

    (promise that must be kept). It is further strengthened

    by maqasid Shariah (Shariahs objective) which allows

    for such action.

    Third-party guarantee based on qardh

    The Fatwa Council of Jordan legitimised third-party

    guarantees based on debts. This resolution was the

    basis for drafting the Muqaradhah Act, section 12

    pertaining to third-party guarantees.

    However, the OIC Fiqh Academy disagrees with

    the basis of third-party guarantees that is based on

    debt and has resolved that third-party guarantees have

    to be in the form of tabarru`. Otherwise, the contract

    is deemed to be an interest-bearing debt which is not


    Mudharib yudharib

    Past Islamic jurists also discussed on the issue of

    mudharabah capital guarantee in the context of

    mudharib yudharib. The mudharib invests the capital

    S H A R I A H S E C T I O N

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    AUGUST 2006 VOL 1 NO 2 ICMmalaysian

    received from rabb al-mal to another party. In other

    words, the mudharib acts as an intermediary between

    the first rabb al-mal and the actual entrepreneur.

    Wahbah al-Zuhaili summed up the views of past Islamic

    jurists on the issue of mudharib yudharib that all the

    four fiqh sects collectively agreed that the first

    mudharib shall be responsible for the liability of the

    guarantee (dhaman) if the capital is invested or handed

    over to another mudharib (third party).

    Generally, mudharib yudharib concept is allowable. If

    it bears any profit, the profit should be distributed

    between the rabb al-mal and the first mudharib based

    on a preagreed rate and the balance is to be distributed

    between the first mudharib and the second mudharib.

    For financial institutions and companies that issue

    financial products based on mudharabah, the concept

    of mudharib yudharib may be applied if they invest

    part of the capital to other parties. If this happens, the

    financial institutions or companies should guarantee

    the capital based on the views of majority of Islamic

    jurists. Hence, in such a situation the interest of investors

    is guaranteed.

    Guarantee through special funds

    Contemporary Islamic jurists also allow the channelling

    of a portion of mudharabah profits to a special fund

    created for the purpose of insuring against future

    losses. This may be done with the concurrence of


    Based on the above arguments and references,

    there are many types of kafalah that can be

    applied to mudharabah capital. As a conclusion, there

    is no definitive indication that the kafalah (guarantee)

    on mudharabah capital is prohibited. Shariah only

    prohibits the mudharib (entrepreneur) from

    guaranteeing its mudharabah capital. Therefore, a

    third-party guarantee on the capital invested based on

    the mudharabah principle is permissible.

    cover page

    With the growth of the Malaysian ICM comes

    the need for a new breed of innovators, regulators,

    advisers and market intermediaries. To equip

    them with a right blend of capital market knowledge

    and understanding of Shariah principles, the SC

    organised two training programmes for different

    groups of market participants, namely, the Islamic

    Market Programme (IMP) and colloquium on sukuk

    musyarakah and sukuk mudharabah, as well as a special

    programme for Shariah scholars, entitled Shariah

    Advisers Workshop.

    The SC has marked these training programmes as an

    important agenda in its annual training calendar. These

    programmes will serve as a platform to create

    awareness among market participants, allowing them

    to discuss issues and keep abreast with the fast changes

    occurring in the ICM.

    S H A R I A H S E C T I O N

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    AUGUST 2006 VOL 1 NO 2 ICMmalaysian

    Islamic bonds are structured based on the foundations

    of Shariah frameworks. In Malaysia, the Shariah

    Advisory Council (SAC) of the SC holds the responsibility

    and is given the mandate to approve the Shariah

    framework, comprising Shariah rulings and principles

    for the issuance of Islamic bonds.

    The SACs decisions are based on two major sources of

    Shariah primary and secondary. Primary sources are

    the Quran and the Sunnah; whereas, the secondary

    sources consist of ijmak (consensus of opinion), qiyas

    (analogical deduction), maslahah (public interest), urf

    (custom) and other sources that are in line with the


    Shariah rulings on Islamic bonds

    The Shariah rulings facilitate and provide guidance

    in the issuance of Islamic bonds, whereby each and

    every market participant will be able to base his

    arguments on a well-understood and well-documented

    standardised framework. From the Malaysian

    perspective, the rulings should be observed and adopted

    where applicable in structuring the Islamic bonds.


    Secondary trading of Islamic bonds which used the

    principles of bai` bithaman ajil (BBA), murabahah and

    istisna` is equivalent to the sale of debt bai` al-dayn.

    Therefore, it must be sold for cash to avoid sale of

    debt for debt (bai` al-kali bi al-kali). However, if the

    Islamic bonds are structured based on the principles of

    ijarah, musyarakah or mudharabah, the SAC is of the

    view that the secondary trading of these bonds does

    not fall within the category of sale of debt.



    Utilisation of the proceeds

    The proceeds raised from the issuance of Islamic bonds

    can be utilised for various purposes including financing,

    provided that the instruments used and financing

    objectives are Shariah compliant. The proceeds can also

    be used for the general business operations of

    conventional financial institutions as long as the

    proceeds are not directly used for any activities and

    instruments which are prohibited by the Shariah.

    Third-party guarantee on the capital

    Issuers of Islamic bonds are allowed to apply third-party

    guarantee on the capital invested under the principles

    of muqaradhah/mudharabah. It was also agreed that a

    fee (ujrah) is allowed to be paid to the guarantor on

    the condition that the guarantee should not be on a

    recourse basis, which means the investors cannot go

    after the issuers in the event of business failure since

    the guarantee will be provided by the guarantor. The

    investors are also allowed to ask for collaterals from

    the issuers in view of possible gross negligence by the


    Asset pricing

    For the purpose of asset pricing in the course of issuance

    of Islamic bonds, the SAC has issued the guidelines on

    asset pricing to facilitate the process of determining

    the selling price of the asset used as an underlying asset

    for Islamic bonds which are structured under the

    principles of BBA and murabahah. The SAC has resolved

    that the selling price of the asset, if it is sold at a

    premium, should not exceed 1.33 times (one and one-

    third) of the market value. On the other hand, if the

    R E G U L A T O R Y S E C T I O N

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    AUGUST 2006 VOL 1 NO 2 ICMmalaysian

    asset is sold at a discount, the selling price should not

    be less than 0.67 (two-thirds) of the market value.

    To further facilitate the asset pricing process, the SAC

    has resolved that if the market value cannot be

    identified, then fair value or any other value that is

    deemed suitable can be used as long as it is based...


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