Series Investment From Islamic Perspective

1st SERIES
INVESTMENT FROM
ISLAMIC PERSPECTIVE

NORADILLA BINTI OSMAN
NOOR AZNI BINTI ABU BAKAR

JABATAN PERDAGANGAN
POLITEKNIK SEBERANG PERAI

1st SERIES
INVESTMENT FROM
ISLAMIC PERSPECTIVE

NORADILLA BINTI OSMAN
NOOR AZNI BINTI ABU BAKAR

JABATAN PERDAGANGAN
POLITEKNIK SEBERANG PERAI

CONTENTS

FOREWORDS iv
PREFACE v
INTRODUCTION vi

CHAPTER 1
INTRODUCTION OF ISLAMIC INVESTMENT

Concept of Islamic Investment 2

Roles of Standard Setting Bodies in Investment 9
Activities

Features of Main Market, ACE Market and 14
LEAP Market

Roles of Islamic Market 17

CHAPTER 2 22
RISK AND RETURN
24
Concept Return and Risk in Islamic 29
Perspective 32

Calculation Return and Risk Measurement
Capital Asset Pricing Model (CAPM)
Relationship between Return and Risk

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otherwise, without prior permission in writing from Politeknik Seberang Perai.

eISBN 978-967-0783-79-6

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Perpustakaan Negara Malaysia Cataloguing-in-Publication Data

Noradilla Osman, 1987-
Investment from Islamic Perspective. 1st Series / Noradilla Osman,
Noor Azni Abu Bakar.
Mode of access: Internet
eISBN 978-967-0783-79-6
1. Investments--Religious aspects--Islam.
2. Stocks (Islamic law).
3. Finance--Religious aspects--Islam.
4. Government publications--Malaysia.
5. Electronic books.
I. Noor Azni Abu Bakar. II. Title.
332.6088297

FOREWORD

Praise to Allah for His grace and mercy, Department of Commerce, Seberang Perai Polytechnic
is able to produce this e-book entitled 1st Series Investment from Islamic Perspective which
marks another milestone in the publication of Department of Commerce, Seberang Perai
Polytechnic for Diploma in Islamic Banking and Finance.

The publication of this e-book is made as an additional reference for students majoring
in Diploma in Islamic Banking and Finance, Department of Commerce, Seberang Perai
Polytechnic. The publication of this e-book is an added value to the main reference because in
the presence of these references can help to develop a group of efficient and knowledgeable
human capital. With the cooperation of lecturers and commitment from the industry,
knowledge and experience are shared through this e-book.

1st Series Investment from Islamic Perspective is designed as a simple, concise and
even practical study guide for students who involved in Islamic Finance and Banking.
Hopefully, this guidebook can help pave a smoother path for students and open their hearts and
interests to deepen the knowledge of Islamic Investment.

May all the efforts in this endeavour be blessed and rewarded by Allah SWT.

PREFACE

In the Name of Allah, the Most Gracious and Most Merciful. All praise be to Allah, Lord of the
Universe, and Peace and Prayers be upon His Final Prophet and Messenger.

This study guide discusses focuses on the understanding of Islamic investment concept
and the application of trading skills in the market. This study guide is published periodically
which for this series, readers will be introduced on Islamic investment concept, regulatory and
standard-setting bodies related to Islamic investment activities; and calculation of risk and
return in investment.

I would like to thank Commerce Department, Seberang Perai Polytechnic for giving
me an opportunity to write this e-book and for their tolerance in seeing this project to its
conclusion. Special thanks and appreciation to my husband, Mohd Hemi bin Ismail and my
colleague, Noor Azni binti Abu Bakar whose support and encouragement made this e-book
possible.

NORADILLA BINTI OSMAN
NOVEMBER 2021 / RABIULAKHIR 1443H

INTRODUCTION

DESICPLINE COURSE

This study guide is provided for semester three (3) students who need to take this course as a
compulsory subject to pass to complete the Diploma in Islamic Banking and Finance.

LEARNING OUTCOME

At the end of this course, student is expected to have the ability and competency to:
1. Understand the concept of Islamic investment using the financial instrument in the
market
2. Understand the roles of standard-setting bodies in investment activities
3. Identify the roles of Islamic market
4. Explain concept of return and risk in Islamic perspective
5. Calculate the return and risk measurement
6. Apply Capital Asset Prising Model (CAPM)

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 1

CHAPTER 1
INTRODUCTION OF ISLAMIC INVESTMENT

Chapter Objectives

Upon completion of this chapter, you should have knowledge of:
1. Concept of Islamic investment
2. Roles of standard setting bodies in investment activities
3. Features of main market, ace market and leap market
4. Roles of Islamic market

2 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

INTRODUCTION OF ISLAMIC INVESTMENT

1.1 CONCEPT OF ISLAMIC INVESTMENT
1.1.1 CONCEPT ISLAMIC INVESTMENT

Islamic investment is a joint pool in which the investors contribute their money for the
purpose of its investment to earn permissible halal profits in strict conformity with the Islamic
law. In order to earn halal profit, all Islamic investment activities must be free from riba
(interest accumulation), maisir (gambling), gharar (uncertainty) and operations based on
selling prohibited products. Besides, Islamic investment fund that is contain pool money by
the investors also have to be invest in an Islamic legal manner.

According to Shariah Advisory Council (SAC), the investment activities is considering
as Shariah compliant if the issuer company declares that its business activities and its business
management are conducted based on the Shariah principles and not involved in any of the
following businesses:

i. Operations based on riba (interest) such as activities of commercial, merchant banks,
and finance companies.

ii. Operations involving maisir (gambling) such as speculative investments. Speculation
is not permitted in Islam and should be avoided because it involves the element of
maisir and the investor does not have the full right on the properties being traded.

iii. Activities involving the manufacture and/or sale of haram (forbidden) products such
as liquor, non-halal meats and pork.

iv. Operations containing element of gharar (uncertainty) such as conventional insurance
business.

All these four factors differentiate the Islamic investments and the conventional investments.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 3

1.1.2 COMPARISON OF INVESTMENT AND SAVING

Everyone wishes to have a financially secured in future for various purposes such as
buying a house, vacation with family, child’s future education, marriage or post retirement
life. Some peoples do like saving money while some peoples interested in investing. Table 1.1
are the several differences between saving and investment.

Table 1.1 Differences between Saving and Investment

Differences Saving Investment
Period Savings are typically for small Investing is typically a long-term
financial objectives to be met in plan for bigger financial goals (5 or
short periods of time (1-3 years). more years ahead).

Example: Purpose of saving Example: Planning for child’s
money to buy mobile phone or to education, wedding or comfortable
go on a small domestic vacation in retired life.
near future.

Access to money Savings serve as handy cash at For investment, access to money

critical time need of money. Easily depends on the kind of

to access money in savings. investments.

Example: Savings able to be Example: Open-ended equity and
withdraw a part or the whole
amount as per wish. mutual funds schemes allow

redeeming investments in any

time. Meanwhile, General

Investment Account does not allow

redeeming investments in any time

because it have a specific

predetermined period of time lock

in the money to earn hibah (gift).

Risk Money savings in the bank Investment may involve risk of

accounts is safer in reputed banks possible potential returns

rather than saving at home. pertaining to the term of

investment or the market

Hence, risk of losing money in situations.

savings very low compared to any

investments. Besides, savings in Invest in equity market comes with

the bank are also entitled to hibah an inherent risk. One might lose

(gift) with discretion by bank. money if not invested in quality

stocks with long-term growth

potential companies.

Risk in investment varies according
to the channels of investments. If
money is invested in good quality

4 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

companies with long-term views,
then short-term ups and downs
should not affect outlook towards
such investments. Mutual fund
provides the scheme details
thereby indicating the possible risk
involved.

Return Return on savings accounts is Investment wisely may give returns
Choice often much lower. In wadiah much higher than savings in the
(saving) account, no monetary long run.
returns are possible because the Investment in General Investment
bank merely agrees to safe keep Account bank fixed deposits offer
the money and the profit given profit based on profit from
based on bank’s discretion. previous year. However, the
investments in equity based
mutual fund schemes carry much
higher potential for long term value
growth. Quality investments have
higher potential returns than
regular savings if compared for a
long term of about 5-10 years.

People intend to save money for Investing is a planning for future
small term goals, emergencies and advisable to start investing at a
and casual expenses as it provides young age.
quick access.
Investments are for the future and
This makes it easier to meet small investing simultaneously may
goals. make it simpler achieve long term
dreams.
Savings are for the present and it
is recommended to save for small Investments are made typically for
term goals. bigger financial goals which may
seem impossible now but would be
For the long run, consider possible in the time to come if they
changing needs, limited income are wisely planned today.
sources and inflation; savings may
fall short for bigger financial goals. Investing smartly is the key to meet
such goals.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 5

1.1.3 CONCEPT OF INVESTMENT ACCORDING TO ISLAMIC PERSPECTIVE

In the context of Muslims investors, several guidelines of Islamic investment concept
must be adhered as follows.
a) Prohibition of riba, gharar and maisir.
Riba means is Al-Ziyadah (additional) extra @ excess. Increase the value of a loan that is
required by the lender or promised by the loan recipient, while in the exchange of certain
goods and currency, it means the difference due to differences in the change. Riba can be
divided into Riba al-Qurudh and Riba al-Buyu’.

i. Riba al-Qurudh occurs through debt or loans. Its involves the practice of lending
money and charge interest. For example a person who provides debt or loan to
someone in the term and take the interest each month. Debt or loan principal
remained until the end.

ii. Riba al-Buyu’ occurs in the trading ribawi product. Its covers two types which is
Riba Nasi’ah and Riba Fadhl.

o Riba Nasi’ah happens when payment of the price and delivery of the ribawi
materials are made at two different times and not immediate. For example,
gold and silver has long been used because of their strength to back currency.
Gold since the first instance be used to back the reserves of a country and back
the issuance of currency. Therefore, currency can be classified as a product
because it acts as a measure of value. Used to measure something of worth.

o Riba Fadhl happens when the ribawi materials being exchanged with different
weights, measurements or numbers. For example, staple food. It is
represented by wheat, barley and salt. Rice is included in the goods.

6 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

Gharar means ambiguity or uncertainty. Lack of information about the state of things, there
was doubt on the existence of goods and information relating to the price. It also relates to
the time for delivery of goods is not known. Gharar is divided into three, namely:

i. Gharar Fahish – selling fish which are still in the river
ii. Gharar Yasir – sell a house with no furniture in any detailed or purchase furniture

that is not clear.
iii. Gharar Mutawassit – gharar which is between Gharar Yasir and Gharar Fahish. For

example, a car was stolen. This ambiguity also occurs at a price, in contract of sale
of goods and buy it.
Investment in the gharar is illegal because not know where the money invested.

Maisir (gambling) means any activity that involves betting, where the party will win will take
all the bets and the loser will lose the bet.

Exhibit 1.1 Elements of Maisir in Investment
Participants lost money premium when events to be covered (the insured events)
does not occur. The insurance company may suffer losses due to the claims that it
appears as if the fortune due to the existence of gharar. Profit from this fate is
considered as GAMBLING.

b) Risk sharing / profit sharing / lost sharing.
i. Risk sharing – when stock prices declined each member will bear the risk of joint
investment in the ratio of invested.
ii. Profit sharing – Profits earned from the investment is divided into two parties as per
agreed based on the agreement.
iii. Lost sharing – in the event of loss on an investment for example share prices fell
sharply, investors will bear the loss together.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 7

c) Time value of money according to Islamic interpretation.
Money is treated as ‘potential capital’. It becomes actual capital only when it joins hands with
other resources to undertake a productive activity. Islam recognizes the time value of money,
but only when money acts as capital, not when it is potential capital.
Value for money during the interpretation of Islam as gold and silver. Gold is a real investment
in Islam. Gold and silver have been used as a currency since 6000 years ago during the ancient
Egyptians time. Gold and silver is very valuable all the times. This is based on the hadith
Prophet Muhammad SAW, narrated by Imam Ahmad Ibn Hanbal: Abu Bakar Ibn Abi Maryam
reported that he heard the prophet SAW was said,

‘There comes a time in which nothing is worth and can be used by mankind. So keep
the dinar and dirham (to use)’

The gold and silver used for commercial purposes because the its never decline in value but
it is on the rise.

d) Prohibition of speculation.
Speculation is defined as the practice of making investment or going into business that
involves risk. Although speculation is a matter to produce normal and part of the nature of
investment, but speculation involving gambling and excessive risk that can cause it to fall into
a forbidden as:

• Fraudulent transaction
• Transaction of riba
• Corrupt transactions
• Transactions in exploitation and monopoly
• Property taken without the owner permission
• Gambling transactions
• Involving business matters that are prohibited

8 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

An Islamic Financial System discourages hoarding and prohibits transactions featuring
extreme uncertainties, gambling and risks.

e) Sanctity of contracts.
Sanctity of contract in Islamic investment is reflected in that way:

i. Contract in Islamic investment is Muamalat system that based on Islamic faith and
obedience to God.

ii. Investment in Islam, the concept of reward and sin has been emphasized in contrast
to conventional direct investment system not to ignore.

iii. The existence and implementation of the investment system is a religious obligation
that must be implemented, but does not identify the conventional investment laws in
question do business.

f) Shariah approved activities.
Investment fund a permissible by Shariah. It is because fund are a form of collective
investment that continue throughout their term, the rights and duties of participants are
define and restricted by the common interest, since they related to third parties rights. Hence,
in cases where the fund is managed on the basis of agency the shareholder/unit holders waive
their right to management, redemption or liquidation except in accordance with the
limitation and conditions set out in the statutes and by laws.

Criteria used for evaluating securities Shariah compliance status:
• Financial services based on riba (interest)
• Gambling
• Manufacture or sale of non-halal products or related products
• Conventional insurance
• Entertainment activities that are non-permissible according to Shariah
• Manufacture or sale of tobacco based products or related products
• Stockbroking or share trading in Shariah non-compliant securities.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 9

1.2 ROLES OF STANDARD SETTING BODIES IN INVESTMENT ACTIVITIES
1.2.1 ROLES OF STANDARD SETTING BODIES IN INVESTMENT ACTIVITIES

Investment activities in Malaysia is supervised and monitored by several standard setting
bodies to ensure all investment activities are directed and follow established standards.

a) Bank Negara Malaysia (BNM)
Established on 26 January 1959 under the Central Bank of Malaysia Act 1958 (CBA 1958).
The CBA 1958 has been repealed by the Central Bank of Malaysia Act 2009 which became
effective on 25 November 2009. It is a statutory body wholly owned by the Government
of Malaysia with the paid-up capital progressively increased, currently more than RM100
million. The Bank reports to the Minister of Finance, Malaysia and keeps the Minister
informed of matters pertaining to monetary and financial sector policies.

The roles of Bank Negara Malaysia is:
i) The Prudent Conduct of Monetary Policy
Among the major role of the Bank is the prudent conduct of monetary policy, which has
seen generally low and stable inflation for decades and thereby, preserving the purchasing
power of the ringgit.

ii) Responsible for Bringing About Financial System Stability
The Bank is also responsible for bringing about financial system stability and fostering a
sound and progressive financial sector. There is now in place a well-diversified
comprehensive and resilient financial sector, that is able to meet the increasingly
sophisticated needs of consumers and businesses, and which has become a growth driver
in the economy.

10 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

iii) Developmental Role
The Bank also plays a significant developmental role, including development of financial
system infrastructure with major emphasis placed on building the nation's efficient and
secured payment systems as well as the necessary institutions (including Securities
Commission, KLSE, now known as Bursa Malaysia and Credit Guarantee Corporation)
which are important towards building a comprehensive, robust and resilient financial
system.

iv) Promotes Financial Inclusion
The Bank actively promotes financial inclusion, which has led to improved access to
financial services for all economic sectors and segments of society, thereby supporting
balanced economic growth.

v) A Banker and Adviser to the Government
Other important roles of the Bank are being a banker and adviser to the Government,
playing an active role in advising on macroeconomic policies and managing the public
debt. It is also the sole authority in issuing currency as well as managing the country's
international reserves.

b) Securities Commission (SC)
SC is a statutory body entrusted with the responsibility of regulating and systematically
developing the capital markets in Malaysia.
Established on 1 March 1993 under the securities commission Act 1993, the Securities
Commission (SC) is a self-funding statutory body with investigative and enforcement
power. It reports to the minister of finance and its accounts are tabled in parliament.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 11

The Roles of Securities Commissions include:
i. Supervising exchanges, clearing houses, and central depositories.
ii. Registering authority for prospectuses of corporation other than unlisted
recreational clubs.
iii. Approving authority for corporate bond issue.
iv. Regulating all matter relating to securities and futures contracts.
v. Regulating the take-over and mergers of companies.
vi. Regulating all matter relating to until trust schemes.

vii. Licensing and supervising all licensed persons.
viii. Encouraging self-regulation.
ix. Ensuring proper conduct of market institution and licensed persons.

Underpinning all these functions is the Securities Commission’s ultimate responsibility of
protecting the investor. Apart from discharging its regulating function, the Securities
Commission is also obliged by statute to encourage and promote the development of the
securities and futures markets in Malaysia.

c) Bursa Malaysia
Bursa Malaysia is one of the largest bourses in ASEAN. Bursa Malaysia is an exchange
holding company incorporated in 1976 and listed in 2005. Bursa Malaysia offers a wide
range of products includes equities, derivatives, offshore and Islamic assets as well as
Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs) and Exchange Traded
Bonds and Sukuk (ETBS).

The Roles of Bursa Malaysia is:
i. Operate and regulate a fully integrated exchange offering a comprehensive range
of exchange-related facilities including listing, trading, clearing, settlement and
depository services.

12 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

ii. Expose the pulse of diversified opportunities for those seeking to expand or invest
with impact.

iii. Helps over 900 companies raise capital across 50 economic activities – whether
through the Main Market for established large-cap companies, the ACE Market
for emerging companies of all sizes, or the LEAP Market for up-and-coming SME
companies.

iv. Provide easy access to many investment products and services, connecting
domestic and foreign market participants to all types of opportunities to help
them to expand or invest with impact.

d) Labuan Financial Services Authority (Labuan FSA)

Labuan FSA was established on 15 February 1996 under the Labuan Financial Services
Authority Act 1996. Labuan FSA is the statutory body responsible for the development
and administration of the Labuan International Business and Financial Centre (Labuan
IBFC).

Labuan FSA licenses and regulates licensed entities operating within Labuan IBFC and to
ensure all such entities remain in compliance with the Labuan laws and regulations and
adhere to the international standards, which are adopted by the jurisdiction. Labuan FSA
develops regulatory policies to ensure orderly conduct of business and financial services
in Labuan IBFC.

The key objectives of Labuan FSA are to:

i. Promote and develop Labuan as an international centre for business and financial
services;

ii. Develop national objectives, policies and priorities for the orderly development
and administration of international business and financial services in Labuan; and

iii. Act as the central regulatory, supervisory and enforcement authority of the
international business and financial services industry in Labuan.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 13

Labuan FSA has been entrusted with the following functions:

i. To administer, enforce, carry out and give effect to the provisions of the Labuan
IBFC laws;

ii. To exercise, discharge and perform such powers, duties and functions in
accordance with the laws;

iii. To maintain the good reputation of Labuan IBFC as an international business and
financial centre;

iv. To carry out research and commission studies on financial services in Labuan IBFC;
v. To make recommendations for the creation and improvement of facilities to

enhance the attraction of Labuan IBFC as a centre for financial services;
vi. To collaborate with Labuan financial institutions and industry associations in

advancing the development and growth of businesses and financial services in
Labuan IBFC;
vii. To advise and make recommendations to the government on matters relating to
financial services in Labuan IBFC; and
viii. To carry out all such activities and undertaken measures to enable appropriate
administration of the Authority, or for other purposes as mandated by the
Minister.

e) Federation of Investment Managers Malaysia (FIMM)

FIMM started as the Federation of Malaysian Unit Trust Managers (FMUTM) on 7 August
1993. As at 6 September 2012, FIMM has 42 ordinary members; all unit trust management
companies and Private Retirement Scheme industry. The recognition of FIMM as a self-
regulatory organisation (SRO), making FIMM play a dual role of an industry body and
public interest body in Malaysia.

A SRO shall ensure that in exercising any of its powers or in carrying out any of its
functions, such power or function shall be exercised or carried out in the public interest
having regards to the need for the protection of investor’s rights through the
establishment of rules that promotes ethics and integrity.

14 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

The Roles of FIMM include:

i. Uphold public interest by enhancing market integrity, market efficiency and
investor protection.

ii. Register all members and organisations that wish to market and distribute Unit
Trusts and PRS.

iii. Promote Investor education and awareness programmes to create an informed
investing community.

iv. Balance the regulation over its members with the advocacy of their interests and
the investing public.

v. Demonstrate proactive monitoring of the industry behaviour and fair and
consistent disciplinary measures must be taken against any misconduct or non-
compliance.

vi. Provide industry expertise in the development of the unit trust industry.
vii. Enhance industry’s sales practices and distribution standards by formulating a

robust sales regime with adequate supervision and monitoring mechanism.
viii. Improve professionalism among UTCs and other distributors.
ix. Increase standards of testing and selection, qualifying examinations and trainings

to maintain the high standards of entry, professional credibility and expertise.
x. Introduce a Continuing Professional Development (“CPD”) framework to keep

distributors aligned with the latest industry developments.

f) The Islamic Financial Services Board (IFSB)

IFSB inaugurated in November 2002 at Kuala Lumpur Malaysia, and became operational
in March, 2003.

Objectives of IFSB

i. To encourage and further craft and develop transparent and prudent Islamic
Financial Services industry and to introduce new or existing international

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 15

standards that is in line with the Sharia and its recommendation for adopting these
standards.
ii. To set up the criteria for standardizing the institutions offering Islamic financial
services and products and to liaises with certain international bodies who are
currently putting their efforts for the stability of the international monetary
system.
iii. To take and encourage initiatives for risk management of the products and
institutions.
iv. To assist in training to improve the skills in the key areas relevant to the markets
and Islamic finance industry as a whole.
v. To research and conduct surveys to evaluate the Islamic finance industry.
vi. To coordinate and engage with other member countries in development of Islamic
finance.
vii. Creating a complete record and managing a database of IFIs and experts of the
industry to seek guidance in case needed.

1.3 FEATURES OF MAIN MARKET, ACE MARKET AND LEAP MARKET

Bursa Malaysia had provided three (3) major markets for share trading intended for
different reasons. This three (3) major markets for share trading differentiate levels of
markets meant for companies in different sizes and industries. The three (3) major markets
are known as MAIN Market, ACE Market and LEAP Market which are now more specialized,
offering investors a better and effective way of trading.

Features of the three (3) major markets can be specified in table 1.2.

16 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

Table 1.2 Features of Main Market, ACE Market and LEAP Market

MAIN Market ACE Market LEAP Market

The MAIN Market in Bursa ACE Market which stands for LEAP Market which stand for

Malaysia is now the ‘Access, Certainty, Efficiency’ is ‘Leading Entrepreneur Accelerator

combination of both markets the new name for the formerly Platform’ is an adviser-driven

which is from Main and known MESDAQ (Malaysian market which aims to provide

Second Board listing. Exchange of Securities Dealing emerging companies, including

and Automated Quotation) small and medium sized

market. enterprises with greater fund

raising access and visibility via the

capital market.

Main market consists major ACE Market consists of LEAP Market is a new platform
names of companies in companies that are more intended for SMEs.
prominent industries in industry-specific aiming.
Malaysia like oil & gas,
airlines and manufacturing.

Company listed in MAIN ACE Market is seen as the ideal LEAP Market is specifically

Market must issue at least market for start-ups and new designed for the smaller players

25% of its total shares to the companies which are run by that want to get listed to inject

public. entrepreneurs who are looking more funds but do not have the

to push for more capital by financial muscle like those in the

listing their companies’ public. two larger markets.

Main Market traded shares, ACE Market provides an LEAP Market aims to bring

REITS, Warrants and ETFs opportunity to the companies together SMEs and companies,

each day. where might not have the large intermediaries, Sophisticated

and high amount like companies Investors and Advisers onto a

in the Main Market but single platform to create a

probably have a strong product conducive marketplace to raise

or service portfolio to funds, a marketplace that

encourage more innovative provides for efficient and

products and companies to push transparent capital formation and

for development and growth.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 17

price discovery mechanisms
compared to a private market.

Top 30 companies’ share Technology companies There are almost 10 companies

performances will then dominate the ACE Market and listed in the LEAP Market which

contribute to the FBM-KLCI followed by lot more specific in are not entirely industry-specific.

index at the end of every various industries.

trading day.

Example companies in Main Example companies in ACE Example companies in LEAP

Market like Top Glove, Air Market like IRIS Corp Bhd, Market include SL Information

Asia, HSBC and others. Matang Bhd, XOX Bhd and many Bhd, Metro Healthcare Bhd and

more. MyKRIS International Bhd, among

others.

1.4 ROLES OF ISLAMIC MARKET

Islamic Market refers to the broad range of investable assets like stocks, sukuk,
commodities, metals, and more. Islamic Market is where businesses and individuals raise
capital in accordance with Shariah. It also refers to the types of investments that are
permissible under Islamic law. For that purposed, Bursa Malaysia has established an Islamic
Markets team, dedicated to the development of Shariah-compliant capital markets products
and trading platform as below.

1.4.1 BURSA SUQ AL-SILA’

Bursa Suq Al-Sila’ (BSAS) are managed by Bursa Malaysia Islamic Services Sdn. Bhd. (BMIS), a
wholly-owned subsidiary of Bursa Malaysia which is regulated, transparent and fully Shariah
compliant.
Bursa Suq Al-Sila’ (BSAS) with collaboration of Bank Negara Malaysia (BNM), Securities
Commission Malaysia (SC), Bursa Malaysia Berhad (Bursa Malaysia), Malaysia International

18 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

Islamic Finance Centre (MIFC), Malaysian Palm Oil Board (MPOB), Malaysian Palm Oil
Association (MPOA) and Malaysian Palm Oil Council (MPOC) had plays vital roles as follows:

i. Be a commodity trading platform specifically dedicated to facilitate Islamic liquidity
management and financing by Islamic financial institutions.

ii. Fully electronic web based platform provides industry players with an avenue to
undertake multi commodity and multi-currency trades from all around the world.

iii. This pioneering effort cements Malaysia's strength in both Islamic finance and Crude
Palm Oil industry.

iv. BSAS integrates the global Islamic financial and capital markets together with the
commodity market.

1.4.2 BURSA MALAYSIA-I

Investors who wish to experience comprehensive end-to-end Shariah Investing are able to
choose to invest in Shariah-compliant securities listed on the Main, ACE and LEAP Market of
the Exchange through the Bursa Malaysia-i platform by interfacing with Islamic Brokers.

Bursa Malaysia-i is a fully integrated Islamic securities exchange platform. Main roles of Bursa
Malaysia-I is:

i. Provide comprehensive range of exchange related facilities with enhancements to
incorporate Shariah-compliant features such as:
a) Listing
b) Trading
c) Clearing
d) Settlement and depository services
e) Leveraging on the existing Bursa Malaysia infrastructure

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 19
Figure 1.1 Bursa Malaysia-i Securities Exchange Platform

1.4.3 ISLAMIC CAPITAL MARKET

Islamic capital market (ICM) is a component of the overall capital market in Malaysia. The ICM
plays an important and complementary role to the Islamic banking system to ensure the
transactions are carried out in ways that do not conflict with the conscience of Muslims and
the religion of Islam. So that the market is free from activities prohibited by Islam such as
usury (riba), gambling (maisir) and ambiguity (gharar). Besides, ICM play a vital role to address
liquidity management for Islamic banks and takaful operators in Islamic countries. The
existence of the first Islamic bonds (sukuk) through ICM has facilitated asset management in
Islamic financial institutions.

20 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

REVIEW QUESTIONS AND PROBLEMS

1. Compare and contrast between investment and saving.
2. Explain the concept of investment according to Islamic perspective.
3. Identify roles of Bank Negara Malaysia and Security Commission.
4. Explain features of Main market, ACE market and LEAP market.
5. Identify roles of Bursa Suq al-Sila’.

FURTHER READINGS

Bakar, N. A. (2020). Islamic Investment. Penang: Azimat Advance Ventures.

FIMM. (2021). Federation of Investment Managers Malaysia. FIMM, 2-5.

FSA, L. (October, 2021). Labuan FSA. Retrieved from https://www.labuanfsa.gov.my/

ISRA. (2016). Islamic Financial Syatem: Principles and Operations. Kuala Lumpur: Millennia
Comms.

Khan, N., & Akmar, N. (2020). Menang Saham. Selangor: Vega Hermosa International Sdn.
Bhd.

Malaysia, B. (October, 2021). Bursa Malaysia. Retrieved from
https://www.bursamalaysia.com/

Naim, A. M., & Zainol, Z. (2015). Islamic Banking Operations: Products and Services. Kedah:
UUM Press.

Sekuriti, S. (October, 2021). Suruhanjaya Sekuriti. Retrieved from https://www.sc.com.my/

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 21

CHAPTER 2
RISK AND RETURN

Chapter Objectives

Upon completion of this chapter, you should have knowledge of:
1. Concept return and risk in Islamic perspective
2. Calculation return and risk measurement
3. Capital asset pricing model (CAPM)
4. Relationship between return and risk

22 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

RISK AND RETURN

2.1CONCEPT OF RETURN AND RISK IN ISLAMIC PERSPECTIVE

Islamic legal maxim had mention the connection between lawful return (lawful profit) and
risk as follows:

i. Reward begets risk (al-ghurm bi al-ghunm),
ii. Benefit begets liability (al-kharaj bi al-daman),
iii. If [property, work and responsibility] is not found, there is no right to the profit.
This legal maxim clearly stated that lawful profit must be accompanied by risk and
responsibility. The criterion of lawful of any return on capital is that one has to be ready for
work and bear any losses if he wants to earn any profit over his investment.

2.1.1 CONCEPT OF RISK AND RETURN IN ISLAMIC PERSPECTIVE

Figure 2.1 The Islamic Theory of Lawful Profit

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 23

The Figure 2.1 shows connection between profit and risk in Islamic theory of lawful profit. The
necessary components of ‘iwad must be present for profit (ribh) to be lawful (halal), and if
any of the components of ‘iwad are not present in a transaction, then the income is unlawful
(haram).

The components of ‘iwad are:
i. risk (ghunm) - refers to market risk
ii. liability (daman) - includes ownership (milkiyyah)
iii. earnings (kasb) - imply to strive to earn or gain wealth, thus implying work and effort
(amal)

Ibn al-`Arabi in his writings once said that, “Every increase which is without an equal counter-
value (‘iwad) is riba”.

Definition of return
Return is a measure of the total profit or loss received by the investor or investment results.
Islam employs various practices that do not involve charging or paying interest, therefore, the
Islamic financial system promotes the concept of participation in a transaction backed by real
assets, utilizing the funds at risk on a profit-and- loss-sharing basis. Such participatory modes
used by Islamic banks are known as Musharakah and Mudarabah. The concept of profit-and-
loss sharing in an enterprise encourages better resource management. For example, the
Islamic Sukuk, money is invested concrete projects and profit share is distributed to clients.

Definition of Risk
Risk is uncertainty about future returns or the chance that the actual return from an
investment may differ from what is expected. This include the possibility of losing some or all
of the original investment. Basically, there are two (2) types of risks:

i. Financial risk - which is market-dependent and determined by various market factors

24 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

ii. Operational risk - which result fraudulent behaviour

2.1.2 COMPONENT OF RETURN

The components of return are divided into two groups. Those are:
Yield is regular income / cash flow to investors / dividends received by investors in the
periodic return on the investment. Example, profit from sukuk or dividend from stocks.
Capital gains is an appreciation in the price of the asset after the differentiation between the
sale price and purchase price is made.

2.1.3 CALCULATE RETURN MEASUREMENT

a) Total Return (TR) / Real Rate of Return
Measures related to the percentage of all cash flows on a security.

TR = cash received + changes in the price
Purchase Price

TR = CFT + (PE - PB) / PB
= CFT + Pc / PB

CFT = cash flow
PE = Selling price
PB = the purchase price
Pc = price change

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 25

b) Holding Period Return (HPR) / Yield (HPY)
HPR is the total return earned from holding an investment for a specific holding period
(usually one year or less) of time. Normally expressed as a percentage. The equation for HPR
is:

HPR= (end. price @ sale price – beg. price @ purchase price + Dividend)

Beginning Price

HPY = (sale price - purchase price + dividends)
Purchase Price

c) Relative Returns (RR)
Relative return is the total return on investment for a period based on one.

RR = TR + 1.0

Compute the Holding Period Return and Relative Return

Example Question
Ali sold the shares at RM 11.50 share after a year the stock is held. The original price when
the shares began to be bought is RM 10.00, RM 0.50 dividend. Calculate the real rate of return
and relative return.

TR = 0.5 + (11.50 - 10) / 10
= 20%

RR = 1.0 + 0.20 = 1.2

26 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

The purchase price is RM 960 for the bond; the coupon interest is 10% and held for 1 year.
Bonds sold at RM 1030. The bond's face value is RM 1000. Find the total return and relative
return.

TR = 100 + (1030-960)
960

= 17.7%
RR = TR + 1.0
= 0.1771 + 1.0
= 1.1771

d) Arithmetic Mean (AM)

In mathematics and statistics, the arithmetic mean, or simply the mean or average, is the
central tendency of a collection of numbers taken as the sum of the numbers divided by the
size of the collection. The collection is often the sample space of an experiment. The term
"arithmetic mean" is preferred in mathematics and statistics because it helps distinguish it
from other means such as the geometric and harmonic mean. The equation is:

X = Σx / n

e) Geometric Mean (GM)

Geometric Mean is the average of a set of products, the calculation of which is commonly
used to determine the performance results of an investment or portfolio. Technically defined
as "the 'n'th root product of 'n' numbers", the formula for calculating geometric mean is most
easily written as: or

or

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 27

G = [(TR1 + 1.0) (TR2 + 1.0) ... .. (TR + 1.0)] 1 / n – 1

Where 'n' represents the number of returns in the series.
The geometric mean must be used when working with percentages (which are derived
from values), whereas the standard arithmetic mean will work with the values
themselves.

f) Expected Return (Ȓ)
The expected return is the amount of profit or loss an investor can anticipate receiving on an
investment. The expected return for a portfolio containing multiple investments is the
weighted average of the expected return of each of the investments.

=∑(Ri Pi)
= (R1 x P1) + (R2 x P2) + (R3 x P3) + ……... + (Rn x Pn)

R = Return expectation in a given scenario
P = Probability of return being achieved in the scenario
n = Scenario number

2.1.4 CALCULATE RISK MEASUREMENT

a) Variance (σ2)
The term variance refers to a statistical measurement of the spread between numbers in
a data set. More specifically, it is used by both analysts and traders to determine volatility

28 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT
and market security. In simple word, variance is used as an indicator to measure the risk
of an asset. The following equation is:

σ2 = ∑ [Ri – ]² P[Ri]

R= Expected rate of return
Ri = Return on i
P = Probability at state n

a) Standard Deviation (σ)
The square root of the variance is the standard deviation which helps determine the
consistency of an investment’s returns over a period of time. The following equation is:

 n

 =  Ri − R 2P Ri 
i=1

b) Coefficient of Variation
Coefficient variation is used to compare risks between assets with different expected rates of
return. The higher CV something assets, the higher the risk of these assets, equation;

CV = 
R

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 29

2.1.5 CAPITAL ASSET PRICING MODEL

a) The Concept of Return and Risk in Capital Asset Price Model (CAPM)
Capital Asset Price Model (CAPM) is used to measure the return on an investment in which
the rate of return should be related to any security with security risk measured as beta. This
model states that the rate of return on securities must consist of two components, namely:

i. Risk free rates (rfr) - the rate derived from securities issued by the government
ii. Risk premium β(rm - rfr)) - differences in market expectations of rates of return with

the portfolio rate of return without risk.The following equation is:

Therefore, the required rate of return should be: RA = rfr + β (rm - rfr)

Beta (β) is a measure of risk cannot be reduced by diversifying the portfolio. This helps the
determination of the required return on investment. The bottom picture is the slope of the
straight line connecting the profits in the securities and the returns in the market risk or beta
of each security is different.

r Security A Beta = 1.5
Security B Beta = 1.0
Security C Beta = 0.5
RM

Securities A and C, βeta (β) = 1.5 and 0.5 show the changes 1 units in the market, but it was a
big change in security returns.
Securities B, βeta (β) = 1.0 shows the change in the same market with changes in securities.

Conclusion: The higher of the beta value, will cause the higher of the return on investment.

30 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

b) Calculation of Required Rate of Return using CAPM Formula
From the information below calculate the rate of return for all securities investors. 15%
market rate of return, risk-free rate of 5%, βA = 1.5, βB = 0.5, βC = 0

Solution

Securities A = 5% + 1.5 (15% - 5%)
= 20%

Securities B = 5% + 0.5 (15% - 5%)
= 10%

Securities C = 5% + 0 (15% - 5%)
= 5%

c) The Concept of Trade-off between Return and Risk on Security Market
Line (SML)

Securities market line (SML) is a linear line represents the CAPM which shows the required
rate of return for each asset or portfolio based on market risk (β). If the rate of return is
expected to be on SML, assets are undervalue, appropriate to invest. If the rate of return is
expected to be under the SML, asset is overvalue, assets should not be investing. Change the
position and slope of the SML caused by two factors, namely changes in inflation expectations
and changes in risk-averse attitude of investors.

Figure 2.2 Risk and Return Trade-Off Concept

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 31
d) Plot CAPM graph and Security Market Line (SML)

Figure 2.3 Security Market Line (SML)

Figure 2.4 Example Plot for SML

32 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

2.1.6 RELATIONSHIP BETWEEN RETURN AND RISK IN INVESTMENT

a) The Relationship between Expected Return and Risk in Investment

Expected returns are directly associated with risk.
Rate of return

●
Risk

The relationship between return and risk commonly associated positively. The higher of the
risk, will cause the higher of the returns.

b) The Relationship between Return and Risk in Long Term Period
Long term directly connected

Rate of return
●

●
Risk

The relationship between risk and return can be seen between the motion graphs. It can be
either above or below the relationship between risk and return.

c) The Relationship between Return and Risk in Short Term Period
Short Term - positive or negative relationship.

Rate of return

Risk
In the short term, investors will not be able to predict the real thing.

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 33

REVIEW QUESTIONS AND PROBLEMS

1. The following table shows the data of investment in security x for the year 2011, 2012,
2013, 2014.

Year Beginning value Ending Value HPY Return relative
RR=TR + 1.0
2011 250 280

2012 280 330
2013 330 260
2014 260 360

Complete the table above with Arithmetic Mean and Geometric Mean calculation.

2. The table shows information for security A and B

Firm’s condition Probability Rate of Return
Boom 0.3
Stable 0.35 Security A Security B
Down 0.35
20 12

10 -5

-2 2

You are required to calculate:

a) Variance and standard deviation
b) Coefficient variation
c) Which security worth investing

34 eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT

3. Union Corp is currently analysing its portfolio which consist of 3 shares with market
capital worth RM200,000.00. Free risk rate is 5% market rate is 10%. Below are the
division of shares:

Shares Investment Worth (RM) Beta Return (R%)
Sime 150,000 3.0 5
Darby 20,000 1.5 10
Gatry 30,000 1.0 15

You are required to calculate:

a) Portfolio percentage for each share
b) Expected return and beta for the portfolio
c) Required rate of return for each share and plot CAPM
d) Conclude your answer

4. Harry Jojo has been offered a few investment opportunities in the stock market. The
information of the investment opportunities are as follows:

Stock Beta Expected Return (%)
Redang 0.4 6
Ladang 1.2 14
Sunshine 0.8 10
Mind Corp 1.4 18
Golden Sky 0.6 8
Highland 0.2 2

The risk free rate is 8% and the market risk is estimated at the rate of 12% for these stocks.
Base don the information above you are required to:

a) Calculate the required rate of return for each stock
b) llustrate the Security Market Line (SML) and indicate the acceptance area and

rejection area
c) Determine the stock which are undervalued and overvalued

eBook PSP | INTRODUCTION OF ISLAMIC INVESTMENT 35

FURTHER READINGS

Bakar, N. A. (2020). Islamic Investment. Penang: Azimat Advance Ventures.

ISRA. (2016). Islamic Financial Syatem: Principles and Operations. Kuala Lumpur: Millennia
Comms.

Khan, N., & Akmar, N. (2020). Menang Saham. Selangor: Vega Hermosa International Sdn.
Bhd.

Malaysia, B. (October, 2021). Bursa Malaysia. Retrieved from
https://www.bursamalaysia.com/

POLITEKNIK SEBERANG PERAI
JALAN PERMATANG PAUH
13500 PERMATANG PAUH
PULAU PINANG
http://www.psp.edu.my