ISLAMIC CAPITAL MARKET
(ISB656)
INDIVIDUAL ASSIGNMENT
(Reflective Paper)
Challenges and Opportunities of Islamic Capital Market
During Covid-19 outbreak in Malaysia
PREPARED BY:
RIDHAUDDIN FAHMI BIN ABDUL RAHIM (2020782317)
KBA 249 5B
PREPARED FOR:
MADAM HASMAH LAILI BINTI JAMALURUS
SUBMISSION DATE
17 DECEMBER 2021
INTRODUCTION
The worldwide economy has collapsed as a consequence of the spread of Covid 19,
which has affected all sectors of the market, including the Islamic capital market. According
to Who, Covid 19 is an aggressive illness caused by the SARS-CoV-2 virus. It is an
infectious and potentially fatal illness. As a result, the government has implemented a variety
of steps to prevent the growth of the Covid 19 pandemic. Among the steps adopted by the
Malaysian government to prevent the spread of this pandemic is the implementation of the
movement control order (MCO), which forced many people and companies to temporarily
suspend operations.
Covid 19 has a negative impact not just on the business but also on the capital
market. The term "capital market" is commonly used to describe trading involving various
financial products. It is widely used as a medium for suppliers and individuals or companies
in order to trade financial instruments such as bonds and equities. Suppliers are often banks
and investors, whereas institutions include governments, public companies, and other
organizations that require funds. The capital market is classified into two type’s namely
primary market and secondary market. The primary market is where a corporation offers
new stocks or bonds for the first time to the public. Meanwhile, the secondary market is a
platform where previously issued securities are traded among investors.
Furthermore, Covid 19 also has an effect on the Islamic capital market. The Islamic
capital market is quite similar to the conventional capital market; the only difference is that
the Islamic capital market follows Sharia law. Its activities carried out on the Islamic capital
market in manners that do not offend Muslims' consciences or the faith of Islam.This is
necessary to guarantee that Muslims do not engage in illegal or sinful activities. When it
comes to finance, Sharia law has strict requirements. Among the things that are not allowed
in Islamic finance are usury (riba), gambling (maisir) and ambiguity (gharar) because this
can cause injustice to others.
CHALLENGES
1) Maintaining Liquidity of Capital Market
The Covid-19 pandemic has drastically elevated banking and investors risks over the wall.
The challenge has been worsened by implementation of movement control orders (MCO)
and fears about the public's health. Currently, the banking system is experiencing liquidity
constraints as a result of an imbalance between demand and supply. Most banks are seeing
substantial cash outflows from the corporate sector in search of liquidity, as well as
withdrawals from deposits held in accounts by governments or government-related
organisations to support major cash financial aid programs. There are not less investors who
want to sell their stocks because they need capital to support their company expenses or to
continue to survive. Indirectly, the Islamic financial market is also affected. This is due to the
fact that the conventional capital market and Islamic capital market are facing the same
problems and banks and investors are their suppliers of cash. As a consequence, banks and
related institutions may face challenges short of cash in order to meet cash demands.
2) Increasing in Default Risk
Next challenge is increasing default risk. Default risk occurs when a borrower is unable to
complete the due payments on their liabilities. Lenders or investors are frequently exposed
to these risks. Even in a stable economy, default risk exists. This also happens in the Islamic
Capital market, where companies that issue stocks cannot provide dividends to investors
due to losses. This is due to the fact that it is a systematic risk which companies cannot
control it, and there are particular circumstances in which this risk will rise. The spread of
Covid 19 infections that affect the economy is one of the causes of increasing default risk.
Therefore, there are delayed loan repayments due to the borrower’s lack of cash. As a
result, financial institutions in Malaysia that provide loans or financial services, as well as
firms or people that invest in stocks or Sukuk, suffer challenges in reclaiming their money.
People may be hesitant to invest in the Islamic capital market as a result of this, and instead
prefer to invest their money somewhere else. The Islamic capital market faces a challenges
in attracting investors to continue investing in the Islamic capital market despite the world
being struck by a pandemic.
OPPORTUNITIES
1) Online Investment
The internet is becoming one of the essential tools of communication with the outside world.
As we all know, the government set up MCO to prevent the spread of Covid 19. This has
restricted our movement, and we are unable to do face-to-face business. As a result, now is
the perfect time for investors to explore the investment platform provided by several
Malaysian institutions in order to upgrade their investment in the Islamic capital market.
There are a variety of softwares available for download on the internet, including Best invest
from Bank Islam and Wahed invest. Both of these apps offer a Shariah-compliant investing
system. The uniqueness of these two systems is the presence of a smart system, also
known as a robot, which assists investors in investing and selecting the best portfolios in the
market automatically based on predetermined settings by investors. So, with an application
like this, it will help to attract investors to continue investing in the Islamic capital Market.
2) Launching New Sukuk
Malaysia's government is concerned about its citizens. Based on the government's
consideration for its people who suffered during the Covid 19 pandemic, the government has
taken the initiative to launch a new Sukuk, which was first issued in 2020. Sukuk Prihatin is
one of the government's efforts to assist citizens during Covid 19 while also increasing cash
flow in the Islamic capital market. The PRIHATIN Sukuk is the first digital issued Sukuk. As a
digital landmark, the sukuk was only available through digital banking services that used
JomPAY and DuitNow. The funds from this Sukuk will be sent to the COVID-19 Fund, which
was established as part of the economic stimulus package, in order to minimise the effects
of Covid 19 on the Malaysian economy. Hence, with the launch of this Sukuk, it gives
investors the opportunity to invest in the Islamic capital Market without fear, this is because
Sukuk issued by the government is secure and investors can invest without fear. The Islamic
capital market also needs to take this opportunities to upgrade digital services to compete
with the conventional capital market.
CONCLUSION
In conclusion, Covid 19 has a negative impact on most people and companies. There
is no denying that companies and the public suffered many losses and some lost their lives
when the Covid 19 pandemic struck. Covid 19 has also affected the stock market in Malaysia
and caused many companies to go bankrupt due to lack of capital to continue the company's
operations. Islamic capital market is also affected by pandemic Covid 19. Among the effects
of Covid 19 on the Islamic capital market are the decline in Shariah -compliant share prices
and the decline in the value of Sukuk. In Malaysia, there are 2 types of capital market
available to the public for traded equities namely Islamic capital Market and Conventional
Capital market. Islamic capital market is quite similar to Conventional Capital market. The
differentiates between Islamic capital market from conventional capital market is, Islamic
capital market operates according to Shariah law and while conventional capital market
operates based on civil law. Muslims must follow Sharia law. That is why the Islamic Capital
Market has emerged, which is a platform for Muslims to trade equities based on Sharia law
and does not engage in usury.
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