investor selection towards shariah and non-shariah compliant investment

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INVESTOR SELECTION TOWARDS SHARIAH AND NON-SHARIAH COMPLIANT INVESTMENT

FATIN SYAZWANI BINTI SAFIYUDDIN

UNIVERSITI UTARA MALAYSIA 2012

INVESTOR SELECTION TOWARDS SHARIAH AND NON-SHARIAH COMPLIANT INVESTMENT

FATIN SYAZWANI BINTI SAFIYUDDIN (201045)

THIS THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE BACHELOR OF ISLAMIC FINANCE AND BANKING (HONS)

ISLAMIC BUSINESS SCHOOL COLLEGE OF BUSINESS UNIVERSITI UTARA MALAYSIA 2012

SUPERVISOR DECLARATION

I, the undersigned, certified that Fatin Syazwani binti Safiyuddin (201045) candidate for the Bachelor of Islamic Finance and Banking has presented her thesis which is Investor Selection Towards Shariah and Non-Shariah Compliant Investment have been examined and accepted as a partial fulfillment of the requirements for the award of Bachelor of Islamic Finance and Banking with Honors.

____________________________ DR. SELAMAH BINTI MAAMOR Senior Lecturer /Supervisor Islamic Business School College Of Business Universiti Utara Malaysia

Date:

STUDENT DECLARATION

I agree and full responsible that this dissertation Investor Selection Towards Shariah and Non-Shariah Compliant Investment is fully done by me. I bear full responsibility for checking whether material submitted is subject to copyright or ownership right.

___________________________________________ FATIN SYAZWANI BINTI SAFIYUDDIN (201045) Bachelor of Islamic Finance and Banking (Hons) Islamic Business School College Of Business Universiti Utara Malaysia

Date:

PERMISSION TO USE

In presenting this research paper in partial fulfillment of the requirement of my Degree in Islamic Finance and Banking from Universiti Utara Malaysia, I agree that the University Library may make in freely available for inspection. I further agree that permission for copying of this research in any manner, in whole or in part, for scholarly may be granted by my supervisor or in their absence by the Dean of College of Business. It is understood that any copying or publication or use of this research or parts thereof for financial gain shall not be allowed without my written permission. It is also understood that due recognition shall be given to me and Universiti Utara Malaysia for any scholarly use which may be made of any material from my research. Requests for permission to copy or to make other use of materials in this research, in whole or in part, should be addressed to

Dean of College of Business Universiti Utara Malaysia 06010 Sintok Kedah DarulAman

ABSTRACTThe focus of this research is to study the investor selection towards shariah compliant investment (SCI) and non-shariah compliant investment (NSCI) which considers demographic background, current investment, knowledge and perception of the respondents. Such a study is important in order to know the literature review about the history of Islamic finance and SCI, decision making and selection towards SCI and NSCI, prohibition elements in SCI and criteria to determine the SCI. The research approach adopted in this dissertation includes descriptive and cross-tab analysis. The sample of this study is 100 staff in Universiti Utara Malaysia (UUM). The findings from this research provide evidence that professionals and management group prefer to invest in SCI. In addition, lack of knowledge and information are main factors that influence investor prefer in NSCI. Researcher also found that investors have a positive perception towards the advantages of SCI, the criteria and high confidence level in SCI, however, the consciousness to choose the SCI is still low. This dissertation recommends that the educational system should be restructured and aggressive promotion should be done. Keyword: Shariah Compliant Investment (SCI), Non-shariah Compliant Investment (NSCI)

PILIHAN PELABUR TERHADAP PELABURAN YANG PATUH DAN TIDAK PATUH SHARIAH ABSTRAKFokus kajian ini adalah untuk mengkaji pemilihan pelabur terhadap pelaburan yang patuh dan tidak patuh shariah dengan mengambil kira faktor demografi, pelaburan semasa, pengetahuan dan persepsi responden. Kajian ini juga melihat kepada kajian-kajian lepas dan telah diklasifikasikan dari aspek sejarah kewangan islam dan pelaburan patuh shariah, proses membuat keputusan dan pemilihan terhadap pelaburan patuh dan tidak patuh shariah, unsur-unsur larangan dalam pelaburan patuh shariah dan kriteria yang diambilkira untuk menentukan status patuh shariah.Penyelidik menggunakan kaedah diskriptif dan crosstab untuk menganalisis data yang telah diperolehi dari borang kaji selidik. Penyelidik telah mengambil 100 sampel yang melibatkan staf di Universiti Utara Malaysia. Kajian telah mendapati bahawa golongan profesional dan pengurusan memilih untuk melabur dalam pelaburan patuh shariah. Selain itu, kurang pengetahuan dan maklumat menyumbang kepada pemilihan pelabur terhadap pelaburan tidak patuh shariah. Penyelidik juga mendapati bahawa pelabur memberikan persepsi yang positif terhadap kebaikan pelaburan patuh shariah, kriteria untuk membuat pelaburan dan mempunyai keyakinan terhadap pelaburan patuh shariah namun, kesedaran mereka untuk memilih pelaburan patuh shariah masih rendah. Penyelidik memberi cadangan agar penstrukturan semula sistem pendidikan dan promosi yang lebih agresif untuk memberi kesedaran kepada pelabur terhadap pelaburan patuh shariah. Kata kunci:Pelaburan Patuh Shariah, Pelaburan Tidak Patuh Shariah

ACKNOWLEDGEMENTThanks to Allah for his blessing, so I could accomplish this academic research within the prescribed time. Countless thanks to my supervisor, Dr Selamah bt. Maamor for her opinions, guidances, encouragements and attentions throughout this academic research. For my beloved parents, Safiyuddin b. Hj. Yusof and Fazillah bt. Megat Said in terms of motivation and financial support in completing this academic research. Last but not least, thank you to the staff of Universiti Utara Malaysia for taking their precious time to answer the questionnaires and give an opportunity to me to complete this academic research. Thank you also goes to Mr. Zamri Salleh, Hani Nabilah bt. Mazlan Ali, Siti Rahmah Yunita Abdul Rahim, Abdul Malik Abdul Rahim, Muhammad Firdaus Hj. Othman and friends who have contributed directly or indirectly during conducting this academic research.

TABLE OF CONTENTSPAGE Supervisor Declaration Student Declaration Permission to use Abstract Abstrak Acknowledgement Table of content List of table List of exhibit abbreviations CHAPTER 1 INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 Introduction Problem Statement Research Objectives Significance Of The Study Scope Of The Study Organisation Of Study 7 1 4 6 7 7 x xi i ii iii iv v vi vii ix List of

CHAPTER 2 LITERATURE REVIEW 2.1 2.2 2.3 2.4 2.5 2.6 Introduction History of Islamic Finance and SCI Decision Making and Selection Towards SCI and NSCI Prohibition of SCI The Criteria To Determine The SCI Conclusion 9 9 12 14 15 18

CHAPTER 3 RESEARCH METHODOLOGY 3.1 3.2 3.3 3.4 3.5 3.6 Introduction Questionnaire Design Sampling Technique Field Work Analysis Plan Conclusion 19 19 21 21 22 23

CHAPTER 4 RESULT FINDINGS 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 Introduction Demographics Background Current Investment Knowledge Perception Demographics Background, SCI and NSCI Current Investment, SCI and NSCI Knowledge, SCI and NSCI Perception, SCI and NSCI Conclusion 24 25 26 28 29 32 33 34 36 42

CHAPTER 5 CONCLUSION AND RECOMMENDATION 5.1 5.2 5.3 Introduction Summary Of Findings Policy Implication and Recommendation 44 44 46

REFERENCES APPENDIX

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LIST OF TABLEPAGE Table 1.1 Table 4.1 Table 4.2 Table 4.3 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9 Table4.10 Table 4.11 Table 4.12 Table 4.13 Table 4.14 Table 4.15 List of Shariah Compliant Stocks in Bursa Malaysia Demographics Background Current Investment Knowledge Towards Basic Islamic Principles and SCI Perception of Information Perception of The Advantages of SCI Perception of Criteria to Make Investment Confidence Towards SCI Demographics Background Towards SCI and NSCI Current Investment Towards SCI and NSCI Knowledge Towards SCI and NSCI Perception of Information Advantages of SCI Criteria to Make Investment Confidence Towards SCI and NSCI 5 25 27 28 30 30 31 32 33 34 35 36 38 40 42

LIST OF EXHIBITPAGE Exhibit 3.1 Schematic Diagram of Research Population. 21

LIST OF ABBREVIATIONSKLSE KLSI MESDAQ NSCI SAC SC SCI UUM Kuala Lumpur Stock Exchange Kuala Lumpur Shariah Index Exchange of Securities Dealings & Automated Quotation Bhd Non-Shariah Compliant Investment Shariah Advisory Council Securities Commission Shariah Compliant Investment Universiti Utara Malaysia

CHAPTER 1 INTRODUCTION1.1 INTRODUCTION The world is now approaching of the second decade of the 21st century. After mid 2008, the world was jolted by a new economic crisis and financial crisis. Effects are being felt primarily the United States (U.S.) and Europe. The decline in the global financial sector are more severe than the financial crisis that hit Asia in 1997. For this moment, U.S. fear the current crisis, while at the same time the country is struggling with a serious crisis in the money market. More financial institutions are affected by the credit crunch. Therefore, on 2nd October 2008, Russian President, Dmitry Medvedev in Russian-German Development Forum said that the best way to overcome this problem was to build a new economic system which enhance the principle of multi-polar world, the rule of law and concern with the common needs. It is clear now that the banks are responsible for the decline in system that impact the world financial crisis. As French President, Nicolas Sarkozy said that "Laissezfaire was dead". The banking crisis happened because many banks create money on its own without any collateral at a

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