Development of the Islamic Capital Market

Development of the Islamic Capital Market Members of the Syariah Advisory Council Left to Right: Y Bhg Dato Dr Abdul Halim Ismail, Prof Madya Dr Mohd Daud Bakar, Dr Mohd Ali Haji Baharom, Y Bhg Datuk Md Hashim Haji Yahaya, Prof Madya Dr Abdul Halim Muhammad Not in Picture: Yang Amat Arif Dato Sheikh Ghazali Haji Abdul Rahman, Sohibus Samahah Dato Hassan Haji Ahmad, Y Bhg Dato Dr Abdul Monir Yaacob

The Malaysian ICM witnessed encouraging development in 2002 with market participants showing greater interest to adopt ICM products and services in meeting their investment and financing needs. Since almost a decade ago when the first IPDS was issued, the ICM has developed and produced a wide range of equity products, debt securities and managed funds. In short, the ICM complements the conventional capital market by providing value-added services that meet the needs of the market for a broad range of instruments. In 2002, the Commission in collaboration with market participants took further steps to promote the continued expansion of the ICM especially in terms of product innovation, mobilisation of Islamic assets, enhancing expertise and development of regulatory framework. Chart 1 Number of Syariah-approved Securities Listed on the KLSE No. of securities 900 800 700 600 500 400 300 Source: Securities Commission Approved Total % of approved Apr 01 Oct 01 Apr 02 Oct 02 82 81 80 79 78 77 76 %of approved securities STATISTICAL UPDATES Syariah-based Unit Trust Funds List of Syariah-approved Securities The Commission released the updated list of securities approved by the SAC, twice in 2002. The first list of securities approved by the SAC (SAC list), released on 26 April, included 79% (652 securities) of the total securities listed on the KLSE while the second SAC list which was released on 25 October included 80% (684 securities) of the listed securities on the KLSE (Chart 1). The SAC list which has been released to the public since July 1997 facilitates and guides investors in identifying listed securities that have been classified as Syariah-approved by the SAC. The SAC list is the main source of reference and guidance for institutional fund managers that manage funds in accordance with Syariah principles such as unit trust funds and takaful funds, as well as for retail investors who only invest in Syariah-approved securities. Another 11 new Syariah-based funds were approved by the Commission in 2002, bringing the total to 44 Islamic funds, representing 23.4% of the total funds in the industry at end-2002 (2001: 19.5% @ 32 funds). It is also noteworthy that one existing conventional fund reclassified its investment objective and operation to qualify as a Syariah-based fund. The NAV of Syariah-based unit trust funds at end-2002 amounted to RM3.21 billion compared to RM2.42 billion, the previous year. It formed 6% of the industry NAV compared to 5.1%, the previous year (Table 1). For the last nine years from 1993 to 2002, the number of approved Syariah-based unit trust funds grew at a compounded annual growth rate (CAGR) of 40.98% compared to 17.51% for the unit trust industry. 2-24

In terms of number of units in circulation, there were 5.76 billion units at end-2002 as compared to 4.26 billion units at end-2001. The number of accounts increased from 266,917 at end-2001 to 302,790 at end-2002. From 1995 to 2002, the number of Islamic accounts grew at CAGR of 18.64% compared with 5.82% for the unit trust industry. Islamic equity funds represented more than two-thirds of the total Syariah-based unit trust funds. Other types of Syariah-based unit trust funds include balanced, money market and bond funds (Chart 2). Islamic Private Debt Securities IPDS continued to be a favourite instrument among corporate bodies for long-term financing. For the last seven years from 1996 to 2002, the IPDS issues have grown at a CAGR of 35.1% compared to only 6.8% for the conventional issues. Growing market demand and appreciation for IPDS especially from Islamic funds has encouraged many corporate bodies to raise new funds through the issuance of IPDS. A Table 1 Syariah-based Unit Trust Funds 2002 2001 Number of management companies 27 23 Number of approved funds* 44 32 Total approved funds size (billion units) 17 10.2 Units in circulation (billion units) 5.76 4.26 Number of accounts 302,790 266,917 NAV of funds (RM billion) 3.21 2.42 % of NAV to total industry 6 5.1 * Includes funds yet to be launched Source: Securities Commission Chart 2 Syariah-based Unit Trust Funds by Type of Funds 2001 2002 Bond 1% Balanced 17% Bond 4% Money Market 1% Equity 82% Equity 71% Balanced 24% Source: Securities Commission 2-25

significant number of submissions were made by corporate bodies to finance their long-term funding needs. In 2002, the Commission approved 171 PDS submissions, valued at RM56.01 billion; of which 34 of these were IPDS valued at RM17.6 billion or 31% of the total new PDS approved (Chart 3). 1 Chart 3 Total IPDS Approved 60,000 50,000 40,000 2002: 31% of PDS approved were IPDS 2001: 42% of PDS approved were IPDS IPDS Conventional PDS Total PDS Most of the IPDS approved by the Commission to date were structured based on the principles of bai bithaman ajil (BBA) 2 and murabahah. 3 In 2002, out of 34 approved IPDS issues, 18 were based on BBA valued at RM11.7 billion or 67% of the total approved IPDS and 16 of the approved IPDS issues were based on murabahah valued at RM5.9 billion or 33% of the total approved IPDS (Chart 4). RM million 30,000 20,000 10,000 0 2001 2002 Source: Securities Commission Chart 4 IPDS Approved by Securities Commission Based on Various Syariah Principles 2001 2002 Istisna' 13% BBA 77% Murabahah 33% BBA 67% Murabahah 10% Source: Securities Commission Note: The above chart excludes Cagamas Mudharabah bonds. 1 Note that the amount of IPDS approved by the Commission may not necessarily reflect the amount of IPDS raised in the market as not all approved IPDS was raised in the same year. 2 BBA refers to an agreement to the sale and purchase for the financing of an asset on a deferred payment basis with a preagreed payment period. The sale price will include a profit margin. 3 Murabahah refers to the contract of sale and purchase transaction for the financing of an asset or project whereby the costs and profit margin are made known and agreed by all parties involved. The settlement for the purchase, which can be done on a deferred lump sum or in instalments basis, will be specified in the agreement. 2-26

In addition, the Commission also approved a total of 37 PDS valued at RM19.6 billion submitted by Cagamas Berhad (Cagamas). Out of that, three PDS were structured under the principle of mudharabah 4 valued at RM0.61 billion or 3.1% of total PDS submitted by Cagamas to the Commission. In relation to the size of IPDS raised for 2002, IPDS accounted for RM14.4 billion or 39.9% of the total funds raised from the bond market 5 (Chart 5). Among the largest issues of IPDS in 2002 were the RM5.1 billion BBA bonds issued by PLUS and the RM1.1 billion BBA bonds issued by Celcom (Malaysia) Berhad. Chart 5 Annual IPDS Funds Raised in the Bond Market (RM billion) 30 25 20 15 10 5 Conventional IPDS 0 1996 1997 1998 1999 2000 2001 2002 Source: Bank Negara Malaysia PRODUCT DEVELOPMENT AND INCENTIVES Issuance of Sukuk Ijarah A significant milestone for the development of ICM products was witnessed with the issuance of global sukuk ijarah 6 by Kumpulan Guthrie Berhad amounting to US$150 million in January and global Islamic sovereign bonds by the Government of Malaysia amounting to US$600 million in June. Kumpulan Guthrie s US$395 Million Sukuk Ijarah Kumpulan Guthrie s US$150 million sukuk ijarah was issued as the first tranche of the US$395 sukuk ijarah programme to refinance an ijarah facility raised earlier by Kumpulan Guthrie Berhad to purchase Indonesian plantation assets. Eight financial institutions located in Labuan and Bahrain became the initial purchasers of the first issue. The sukuk which received a rating of BBB+ from MARC International Limited is primarily listed and traded on the Labuan International Financial Exchange (LFX). Malaysian Government s US$600 Million Sukuk Ijarah The Malaysian government sukuk deal of US$600 million was structured as a five-year floating rate security with the typical conventional bond terms, condition and issuance processes but is Syariah-compliant to attract both conventional investors as well as Islamic investors. In terms of geographical distribution, the deal achieved an even split with about half of the sukuk being placed in the Middle East, followed by Asia, Europe and the US. The sukuk was rated Baa2/BBB by Moody s and Standard & Poor s rating, and is listed on the Luxembourg Stock Exchange (LSE) and Labuan International Financial Exchange (LFX). 4 Mudharabah refers to an agreement which is made between two parties or more to finance a business project. The parties are rabb al-mal or investors who provide the capital and a mudharib or an entrepreneur who manages the project. Profits derived from this project will be distributed based on a preagreed ratio and any losses will be borne by the investor. 5 Percentage of IPDS exceeds those of conventional PDS if Cagamas bonds, including Cagamas Mudarabah bonds, are excluded in the calculation. 6 Sukuk A document or certificate which represents the value of an asset. Ijarah A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or an equipment to its clients at an agreed rental fee and predetermined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hand of a lessor. 2-27

Both the sukuk ijarah issues clearly signify Malaysia s commitment in developing global ICM. The initiatives taken by the government and Guthrie were also consistent with a CMP recommendation which encourages government and government-related bodies to raise funds using global Islamic securities. Islamic Index-linked Fund It is also noteworthy that, in response to the successful introduction of the KLSI in 1999 and to further diversify the range of Syariah-based unit trust funds, the first Islamic fund designed to replicate the performance of the broad-based KLSI was introduced in January. KLSI is an indicator for the performance of the Syariah-approved securities and comprises Main Board shares that are on the SAC List. The index fund is structured to appeal to investors seeking long-term capital appreciation through investing in a representative sample of Syariah-approved securities drawn from the KLSI. The introduction of an index-based Islamic fund has widened the investment choices for investors and complements the existing range of investment funds available in the ICM. Tax Incentives As part of the continuous effort to promote greater product innovation and to encourage local issuers to subscribe to universally accepted Syariah-compliant products, in particular products that are acceptable to Muslim investors from the Middle East, the government in its Federal Budget 2003, allowed tax deduction on expenses incurred in the process of structuring, documenting and issuing IPDS against the income for a period of five years. The incentives are given to issuers who adopt the Syariah principles of ijarah, mudharabah or musyarakah for structuring IPDS. Currently, most IPDS issues are based on the principles of BBA and murabahah. ENHANCING REGULATORY FRAMEWORK Guidelines Relating to Syariah-based Unit Trust Funds Consistent with its commitment to develop and promote the ICM in Malaysia, the Commission issued two sets of practice notes in relation to the management of Syariah-based unit trust funds in Malaysia in 2002. The practice notes issued pursuant to the Guidelines on Unit Trust Funds, were: Practice Note 18 Additional Requirements for Schemes Managed and Administered in Accordance with Syariah Principles (PN18); and Practice Note 19 Procedures for Registration and Appointment of Syariah Committee Members/Syariah Consultants for Schemes Managed and Administered in Accordance with Syariah Principles (PN19). PN18 took effect from 1 January 2003 while PN19 took effect on 10 July 2002. In relation to PN19, the Commission registered 27 Syariah individuals and two Syariah consultants as at 31 December 2002 (further discussions on these provisions are highlighted in the article on page 2 32). Registration of Syariah Adviser for IPDS Issues As stipulated in the PDS Guidelines (paragraph 32), IPDS issuers must appoint an independent Syariah adviser, approved by the Commission, to advise on all aspects of IPDS including documentation, structuring and investment. The independent Syariah adviser can be an individual or a company who meets the minimum requirements stated in the PDS Guidelines. However as an alternative, the issuer can also engage a Syariah committee of an Islamic bank or a licensed institution approved by the BNM to carry out an Islamic banking scheme. 2-28

In 2002, the Commission approved another two applications for registration as Syariah advisers. This brought the total number of Syariah advisers approved and registered by the Commission to five (of which, four are companies). SYARIAH ADVISORY COUNCIL Appointment of the SAC Members Syariah scholars have an important role to play to ensure and maintain public confidence in the ICM by ensuring that the range of products and services offered by market participants are in full compliance with Syariah principles. Pursuant to this need, the Commission has since June 1996 established the SAC to review and provide guidance on all matters related to ICM to ensure conformity with Syariah principles. In 2002, the Commission reappointed all of the SAC members for another two-year term with effect from 1 July 2002 to 30 June 2004. (iii) (iv) contract for the supply of goods and maintenance that is made with the government as an approved underlying asset for structuring the IPDS. Both decisions were based on iqta 7 principle of the Islamic jurisprudence in which qiyas (analogy) methodology is applied. When Issue (WI) process for the issuance of PDS in the primary market is recognised as Syariahcompliant. The ruling was made on the basis that there are no elements of riba (usury) and gharar (uncertainty) in the WI process. In the event that unit trust companies which manage Syariah-based funds invest in non-approved securities, the companies are required to dispose the non-approved securities within one month after discovering that the investment is Syariah noncompliant. Any gains i.e. capital gains or dividend received from the disposal must be channelled to charitable bodies. Issues and Resolutions In 2002, the SAC held eight meetings and deliberated on several Syariah issues in relation to ICM. Among the major issues were: (v) Financial forecasts cannot be applied in performing Syariah compliance reviews on equity securities due to uncertain factors of the actual outcome of the issuing company s audited financial results. (i) (ii) Issuers of IPDS 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 issuers. Concession rights are accepted as an approved underlying asset for structuring IPDS under the principle of BBA. It was also agreed to recognise the Harmonisation of Syariah Rulings The Commission had in July, informed relevant industry bodies and associations on the importance of recognising the SAC as the only body that can make pronouncements to the public on any Syariah matters in relation to the capital market. This was done to ensure harmonisation and standardisation of Syariah rulings and to avoid possible divergence of Syariah interpretations among Syariah scholars in the country. As such, the in-house Syariah advisers or committees of the members of industry bodies or associations should provide advice and guidance on internal process only and should not make pronouncements to the public. 7 Iqta is the assignment of public property, or the usufruct of a public property by the government to a private individual or organisation. 2-29

TRAINING AND EDUCATION Islamic Capital Market Week As an ongoing effort to enhance the awareness of Malaysia s ICM, the Islamic Capital Market Week was organised from 26 30 March 2002. It was launched by the Honourable Prime Minister Dato Seri Dr Mahathir bin Mohamad. The ICM Week was intended to showcase Malaysia s current achievements in developing the ICM alongside a conventional market and to discuss efforts taken to further promote Islamic products, instruments and institutions. The ICM Week was anchored by the two-day Kuala Lumpur International Islamic Capital Market Conference followed by other educational seminars on issues such as Islamic financial planning, Syariah equity investment, closeddoor forums for Syariah experts and fund managers and exhibition on ICM products and services. Open seminars were also organised by market intermediaries in Penang, Terengganu and Sarawak. Resolutions of the Securities Commission Syariah Advisory Council Given the importance of providing guidance to the general public in attaining a better understanding of the ICM, the Commission published the book Resolutions of the Securities Commission Syariah Advisory Council. The book, launched by the Honourable Prime Minister Dato Seri Dr Mahathir bin Mohamad at the Kuala Lumpur International ICM Conference, provides useful information on the resolutions and views of the SAC, and the Syariah arguments used as the basis for the formulation of such resolutions. Forum on Global Islamic Capital Market A closed-door forum for government-related entities, corporate advisers, rating agencies, policy makers and regulators on issuing Islamic debt securities in the global market entitled, Forum on Global Islamic Capital Market was organised in June. The forum allowed participants to exchange views and ideas on the prospect of issuing global Islamic bonds and drawing funds from the global Islamic financial markets. The forum was a timely initiative, in tandem with the Guthrie and the Malaysian government sukuk ijarah issues. Clarification on Requirements of Relevant Guidelines In anticipation of enquiries from the public on certain requirements of the relevant guidelines on ICM, the Commission posted a set of FAQs on its website. Clarifications were provided on various issues such as the application to be registered as an independent Syariah adviser, Syariah principles that can be used for structuring IPDS, Syariah guidance on the treatment of capital gains, early settlement and late payment, and others to enhance the public s understanding on the requirements of the guidelines on ICM. Seminars and Talks The Commission also organised other educational programmes on ICM during 2002: Seminars and talks for students of institutions of higher learning Universiti Malaya, Universiti Utara Malaysia, Kolej Islam Darul Ehsan, Kolej Islam Yayasan Pelajaran Johor, Kolej Islam Antarabangsa Sultan Ismail Petra and Politeknik Sultan Salahuddin Abdul Aziz Shah. A workshop for compliance officers of the unit trust management companies that manage Islamic funds. INTERNATIONAL DEVELOPMENTS IOSCO Task Force on Islamic Capital Market At the IOSCO annual conference in Istanbul in May 2002, the Commission was given a mandate to lead a task force on Islamic capital markets. The broad aim of the task force is to 2-30

study the extent of development and potential regulatory and Syariah compliance issues relating to ICMs in member jurisdictions (further details on this mandate is provided under the International Co-operation chapter). SAC Member Sits on the International Syariah Advisory Board Given the importance of harmonising and standardising universal Syariah issues in relation to Islamic finance, it is therefore practical and strategic for Malaysian Syariah scholars to regularly interact with Syariah scholars from the Middle East. One of the effective mechanisms to achieve this objective is to encourage Malaysian Syariah scholars to sit on the Syariah board of international financial organisations. In realising this, the Commission successfully nominated one of its SAC members, Associate Professor Dr Mohd Daud Bakar, to sit on the Syariah Board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), based in Manama, Bahrain. 2-31

ISLAMIC UNIT TRUST FUNDS: ENHANCING COMPLIANCE AND CREDIBILITY The introduction of Islamic unit trust funds (Islamic funds) has enabled both Muslim and non-muslim investors in Malaysia to invest and participate in Islamic investments that are professionally managed. The first Islamic fund was introduced in 1993 and in less than 10 years, the industry has achieved 44 Islamic funds. The number of approved Islamic funds experienced a CAGR of 40.98% compared with 17.51% in the unit trust industry over the same period. The growth of Islamic funds became more apparent in 1997 when the Commission first released the list of securities approved by its SAC. The list which was developed after the SAC had conducted its annual review on all securities listed on the KLSE, to a large extent, had increased market confidence and created greater certainty for UTMCs in managing Islamic investment portfolio and for investors investing in Islamic funds. In addition, the list attracted further interest and support from the industry to establish more Islamic funds. One of the new Islamic funds introduced recently was an Islamic index fund, designed to replicate the performance of the broad-based KLSI. dividends are paid out from the income received or capital gains made from the investment in Syariah-approved securities only. The relationship between the unit holders and the managers of Islamic funds can be formed in two ways. The common approach adopted by most unit trust managers is the wakalah (agency) approach. In this case, the manager is paid a fixed-fee percentage of the gross net asset value (GNAV) of the fund under its management. This approach is consistent with the concept known as ujrah (fee-based) in the Islamic financial transactions or fiqh muamalah. Notwithstanding this, there is a small number of unit trust managers who adopt the principle of mudharabah (trust partnership) in managing the fund, whereby the return to the unit holders is based on a predetermined profit-sharing ratio between the unit holders and the manager. The manager will share a certain percentage of the profit derived from the investment activities under its management. Hence, the income to unit trust manager will depend on the financial performance or net profit of the fund. Islamic Investment Principles In principle, Islamic investments do not participate in activities which involve riba (usury/interest), maisir (gambling/gaming) and gharar (uncertainty) and other activities that are ill-gotten (haram) from the Syariah point of view. Similarly, Islamic funds must ensure that the investment made is also in accordance with Syariah principles. The investment return to unit holders of Islamic funds will be in the form of dividends and is not different from conventional funds except that the Specific Regulatory Requirements for Islamic Funds The regulation and compliance requirements for Islamic funds are similar to those imposed on conventional funds. As such, the Guidelines on Unit Trust Funds (Guidelines) are also applicable to the regulation of Islamic funds. However, in order to ensure that the operation and management of Islamic funds are carried out in accordance with Syariah principles, additional requirements for Islamic funds have been provided in the 2-32

Guidelines. These requirements are provided in paragraphs 6.4, 6.5 and 6.6 of Chapter 6 of the Guidelines which set out the requirements for any approved Islamic fund to appoint a Syariah committee or Syariah consultant. These paragraphs also provide specific requirements on the qualification of Syariah members and the role, powers and duties of a Syariah committee or Syariah consultant. The principle role of a Syariah committee or Syariah consultant is to ensure that the fund is managed and administered in accordance with Syariah principles. The Syariah committee or Syariah consultant should also provide expertise and guidance for the fund in all matters relating to Syariah principles, including the fund s deed and prospectus, its structure and investment, and other operative and administrative matters. The above compliance requirements are provided to ensure that the credibility and integrity of Islamic funds are continuously preserved, as failure to comply with the requirements set out in the Guidelines would not only tarnish the reputation of unit trusts managers and their Syariah committees or Syariah consultants, but would also affect public confidence in the credibility of Islamic funds. Syariah Rulings and Guidance The role and function of a Syariah committee or Syariah consultant have greatly assisted Islamic funds in managing Syariah compliance issues. Nevertheless, for issues which are not specific to the fund and may have an impact on the industry as a whole or are too complex for a Syariah committee or Syariah consultant to deal with, as it may require extensive research, the SAC will provide relevant Syariah rulings and guidance that are applicable to all Islamic funds across the board. In this situation, the SAC from time to time will provide general rulings and guidance to the industry as part of the efforts to harmonise and standardise Syariah compliance issues relating to Islamic investments. Among the relevant and applicable Syariah rulings and guidance since the establishment of the SAC in 1996 are: List of Syariah-approved Securities The list of securities approved by the SAC is developed to facilitate investors particularly the Islamic investment community in selecting Syariah-approved securities that are listed on the stock exchange. It is also a product which has been further improved from the list of halal securities produced by Bank Islam Malaysia Berhad which was the main source of reference for the industry before the SAC s list was issued. With the availability of the list, all Islamic funds are now guided by a common list of approved securities. Approved Securities which are Subsequently Considered Non-approved The Syariah status of securities may change from year to year depending on the result of Syariah compliance reviews carried out by the SAC. This would occur, for example, on securities which were earlier classified as approved securities but due to certain factors, such as changes in the companies operations, the securities were subsequently considered non-approved after a compliance review process. It is the responsibility of the Syariah committee or Syariah consultant of Islamic funds to ensure that non-approved securities are excluded from their portfolios. To facilitate Islamic funds in dealing with the above situation, the SAC has provided a general guidance whereby the fund must immediately dispose of nonapproved securities on the day the updated list is announced to the public. If the disposal cannot be made on the same day, the fund must dispose of it the following trading days, provided the investment cost is at least equal to the market price of such non-approved securities. 2-33

Otherwise, the non-approved securities can still be held if the investment cost is below the current market price. This SAC guidance must be observed by Islamic funds to ensure continuous compliance with the Syariah decision. Non-approved Securities Another issue of concern arises when the fund has invested in non-approved securities. This could occur under various situations, one of which is where the investment is made without knowing the Syariah status of the securities in the first place. Since it is an Islamic fund, the holding of such non-approved securities would essentially breach Islamic investment principles. The SAC was consulted on this and made a resolution that the investment in such non-approved securities by Islamic funds should be immediately disposed of within a month after realising that they have invested in such non-approved securities. The SAC further deliberated that any gain made from the disposal must be channelled to charitable bodies. This is important, as the Islamic funds must ensure that the dividends paid to the unit holders of Islamic funds should not contain any element of profit derived from non-approved securities investment. In this regard, it is the responsibility of all parties involved in the administration of the fund such as unit trust managers, compliance officers, trustee, investment committees and Syariah committees or Syariah consultants to diligently comply with the above rulings so that the credibility of the funds is continuously upheld. Additional Measures to Enhance the Credibility of Islamic Funds As the statutory authority entrusted to, among others, develop and promote the capital market, the Commission continues to ensure and maintain the credibility of products and services in the ICM, from the Syariah point of view. Recently, the Commission released two sets of practice notes relating to Islamic funds to further enhance the quality of management and administration of such funds. These efforts are in line with the Commission s commitment to develop the ICM in Malaysia, as set out in the objectives of the CMP. The two practice notes, issued pursuant to the Guidelines are: Practice Note 18 Additional Requirements for Schemes Managed and Administered in Accordance with Syariah Principles (PN18); and Practice Note 19 Procedures for Registration and Appointment of Syariah Committee Members or Syariah Consultants for Schemes Managed and Administered in Accordance with Syariah Principles (PN19). PN18 was introduced after extensive consultations with industry participants, with a view to further enhance the integrity and credibility of Islamic funds. The practice note, among others, requires additional roles to be undertaken by a Syariah committee or Syariah consultant appointed in relation to the management of Islamic funds, the investment committee, trustee and compliance officer. This practice note also requires the Syariah committee or Syariah consultant for a Islamic fund to prepare a report certifying whether the fund has been managed and administered in accordance with Syariah principles. This requirement provides another degree of transparency and greater assurance for the investing public. In addition, PN18 seeks to enhance the skills set of Syariah committee members to ensure that persons appointed in such capacity possess the necessary skills and abilities to perform their functions effectively. PN18 also emphasises the importance of the investment committee to have at least two members who are Muslim with a minimum of one Muslim member to be present 2-34

at all meetings to satisfy the meeting quorum. It also requires the compliance unit to have suitably qualified persons with at least one compliance officer or assistant who is knowledgeable in Syariah law or Syariah principles. The last requirement stipulated in PN18 is for the trustee to provide transaction reports on the activities of the fund to the Syariah committee or Syariah consultant. PN19, on the other hand, was introduced to facilitate the approval process relating to the appointment of Syariah committee members and Syariah consultants for such funds. It sets out registration procedures for Syariah committee members or Syariah consultants. The objective of the registration procedures is to provide a more efficient and expedient framework for the appointment of Syariah committee members or Syariah consultants by Islamic funds. Only Syariah individuals and Syariah consultants who have been registered with the Commission, are eligible to provide their advisory services for Islamic funds. The registration of Syariah individuals or consultants is valid for three years. To date, the Commission has approved and registered 27 Syariah individuals and two Syariah consultants. The introduction of PN18 and PN19 generally marks the Commission s continued efforts at developing the ICM and at the same time, further enhance the credibility and integrity of Islamic funds, in line with the CMP s objectives to establish Malaysia as an international ICM centre. 2-35

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