An Islamic Perspective on Capital Markets and "Islamic" Securities in Malaysia

Financial systems channel funds in an economy from the surplus economic units lacking appropriate investment opportunities to the deficit economic units with such opportunities. The surplus units seeking returns by employing their funds in productive activities and the deficit units interested in exploiting their investment opportunities contact one another through a network of financial markets and institutions in the economy. The participants make financial contracts in ways which satisfy their requirements regarding liquidity, denomination, maturities, and risk diversification [Anwar (1987), pp. 296-297]. In this way, the financial markets contribute to a higher production, efficiency, and economic welfare of everyone in the society [Mishkin (1989), p. 45]. In recent years, the appetite for investment in the markets of developing countries has increased manyfold [Hussain (1994), p. 2]. A good many of such developing markets are in Islamic countries such as Egypt, Turkey, Bangladesh, Pakistan, and Malaysia. Well-developed Islamic financial markets would contribute towards economic development by attracting capital inflows and checking capital flight from the Islamic nations. Islamisation of financial institutions, especially banking and insurance, has received sufficient attention since 1950. In fact, a number of Islamic banks and insurance companies are now operating worldwide. Islamisation of financial markets has, however, received relatively little attention from the academic and practitioners, although some "Islamic" securities have been introduced in several Muslim countries including Pakistan, Jordan, Sudan, Iran, and Malaysia. The major task of this study is to discuss the "Islamicity" of the main activities in the conventional capital markets and the Malaysian "Islamic" capital market instruments in the light of Islamic principles. The study is organised as follows. An Islamic criteria for portfolio management through capital market activities is developed in Section 2. The "Islamicity" of conventional capital market (with an emphasis on secondary markets) operations and the "Islamic" capital market in Malaysia are discussed in Sections 3 and 4 respectively. Additional recommendations towards the Islamisation of capital markets are made in the final section.