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Summary of Investment Account Platform (IAP) in Budget 2015

Available at: http://alnaqiy.com/home/article/budget-2015-investment-account-platform-iap/

In 2015 Budget speech, YAB Dato’ Sri Mohd Najib Tun Haji Abdul Razak said that the Government will introduce a new Sharia-compliant investment product called the Investment Account Platform (IAP) next year, with an initial start-up fund of RM150 million.

IAP will provide opportunities to investors in financing entrepreneurial activities and developing viable Small and Medium Enterprises (SMEs). At the same time, IAP will be a platform to attract institutional and individual investors including high net worth individuals to invest in the Islamic financial market. In other words, it provides choices for banking clients as to where they can deposit their money.

As an incentive to utilise this platform, the Government proposes individual investors be given income tax exemption on profits earned from qualifying investment for three consecutive years.

We were unable to get more information on the detailed features of the IAP when we produced this write up, however, in due course, once implementation takes place, we are optimistic that the policy makers will make further announcements about it.

Commentary

The Government seems committed to improve and strengthen the Islamic financial market in Malaysia with the introduction of the Investment Account Platform (IAP) next year, with an initial start-up fund of RM150 million.

IAP is a new Sharia-compliant investment platform with the aim to attract participation from individual and institutional investors to invest and boost the development of SMEs. We believe that the IAP is an initiative to support the implementation of the Islamic Financial Services Act 2013, in particular the move to segregate Islamic banks deposits into either Islamic deposits or investment accounts, which is considered by the industry a major milestone. In order to comply with the new legislation, Islamic banks are required to come up with a wider range of products for both classifications so to benefit the diverse needs of customers.

The introduction of IAP has been warmly welcomed by Islamic finance industry players. It is recognized as the next stage after the implementation of the IFSA 2013. It encourages equity-based participation instead of debt-based and its rate of return is based on the profit and loss. In investment account platform, the Sharia concept of musharakah (joint venture) or mudharabah (profit sharing) may be applied in the product.

The first concept, musharakah refers to a partnership or a joint business venture to make profit. Profits made will be shared by the partners based on an agreed ratio which may not be in the same proportion as the amount of investment made by the partners. However, losses incurred will be shared based on the ratio of funds invested by each partner. – (islamicfinanceinfo.com)

On the other hand, mudharabah is a profit sharing arrangement between two parties, that is, an investor and the entrepreneur. The investor will supply the entrepreneur with funds for his business venture and gets a return on the funds he puts into the business based on a profit sharing ratio that has been agreed earlier. The principle of mudharabah can be applied to Islamic banking operations in 2 ways: between a bank (as the entrepreneur) and the capital provider, and between a bank (as capital provider) and the entrepreneur. Losses suffered shall be borne by the capital provider. – (islamicfinanceinfo.com)

These are the ideal modes of financing according to Sharia. Thus, Islamic financial institutions, investors and SMEs as well as entrepreneurs can choose either to practice musharakah or mudharabah in their financing activities.

There is also another Sharia concept that can be applied in investment account which is wakalah (agency). Wakalah refers to a contract whereby a person (principal) asks another party to act on his behalf (as his agent) for a specific task. The person who takes on the task is an agent who will be paid a fee for his services. – (islamicfinanceinfo.com)

For example, a customer asks a bank to invest his money for him and pays him a fee. The customer then will keep any profit arising from this account and the bank as an agent will carry out the financial transaction to the customer.

The most appealing facet of the IAP is the tax incentive. The government proposed that profits earned by individual investors from IAP are to be given income tax exemption with conditions. Aljeffridean, Chartered Accountants (M) described the conditions as follow:

  • Tax exemptions shall only be accorded for three consecutive years starting from the first year profit is earned;
  • The investment is made for a period of 3 years starting from the operation date of IAP;
  • Tax incentive shall only be accorded for investment activities in Malaysia, in venture companies owned by Malaysian or locally incorporated companies;
  • Tax exemption shall only be accorded for investments made in SMEs and venture companies in any sectors; and
  • Definition of SMEs is as per the latest definition issued by SME Corporation Malaysia.

It is hoped that by introducing the tax incentive, IAP will be able to play a crucial role to strength Islamic financial market as well as economic growth for the benefits of people’s economy. It is also hoped that the Government will seriously take into account their promise to emphasise the balance between the capital economy and people’s economy. In fact, Islam also demands the leaders to pay attention to their followers’ needs.

The Messenger of Allah (ﷺ) say: “If Allah puts anyone in the position of authority over the affairs of the Muslims, and he secludes himself (from them), not fulfilling their needs, wants, and poverty, Allah will keep Himself away from him, not fulfilling his need, want and poverty.” [Sunan Abi Dawud, 2942. Grade: Sahih (al-Albani)]

Allah knows best.

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