Islamic Finance Market

Islamic Finance Market

Islamic Approach for the Financial Market

Like conventional markets, Islamic financial markets have two components: capital and money markets. The Islamic Financial Market (IFM) refers to the market where the financial instruments are traded in ways that do not conflict with the Shari’ah principles. In other words, the IFM represents an assertion of religious law in the financial market transactions where the market should be free from the involvement of prohibited activities by the Shari’ah.

Most of the financial instruments used in contemporary financial markets are based on interest, which is clearly prohibited in Islam. Hence, development of financial instruments whose provisions, terms and conditions do not violate Shari 'ah principles, is the first and foremost requirement towards the evolution of Islamic capital markets. Secondly, most of the practices of capital markets, in handling financial instruments may also be repugnant to both Islamic law as well as Islamic norms of morality. There i s a need to review the present practices prevailing in the financial market to identify which of these practices needed to be reformed from an

Islamic point of view and which of them may be acceptable. Thirdly, institutions, which may be conducive to functioning of Islamic financial markets, need to be established.

Islam is not averse to the idea of financial intermediation. It is a fact, that whatever be the form of economic organisation, a society, may have surplus and deficit households in terms of possession of financial resources. Hence, efficient use of financial resources of the society would necessitate some form of cooperation between the surplus and deficit units.

Key features of Islamic capital market instruments

a) Instrument should represent share in equity, real assets, usufruct or a combination of some or all of these and should not earn money on debt.

1) Instrument representing real physical assets and usufruct are negotiable mar ket price.

2) Instrument representing debts in their negotiability are subject to rules of hawalah.

3) Instrument representing a combination of different categories are subject to rules relating to the dominating.

• If debt are relatively larger the portfolio’s negotiability will be subject to hawalah-al-dayn

• If currency component is larger to sarf and

• If real / physical assets and usufructs are overwhelming, to selling at market prices.

b) The Issuance of Islamic Financial Instruments based on mudarabah or musharakah is subject to following conditions:

i) The Principle and expected return on investment cannot be guaranteed

ii) If the financial instrument were issued for specific purposes or projects, the prospectus should include full disclosure of the nature of the activities, contractual relationships and obligations between the parties involved and ratio of profit sharing; and

iii) The issuers of financial instruments should keep separate accounts for each project and must declare its profit and loss accounts at the date mentioned in the prospectus and balance sheets.

c) Holder of Islamic financial instruments are the owners of whatever rights these instruments represent and bearers of all related risks, and

d) An Instrument the object of which is debt should not be allowed to earn any return and that its negotiability/tradability must be in accordance with the shari’ah rules.

Objectives of Islamic Financial Market

In principle, the objectives of the Islamic financial market are again based on the Shari’ah, which in essence should be treated as an important and necessary vehicle to transfer funds from surplus to deficit units. This is to ensure the equitable allocation of capital to sectors which would yield the best of returns to the owners of capital and hence contribute towards the overall growth and expansion of the economy.

It is also the objective of the Islamic financial market to ensure that there exists a means of attracting surplus funds for worthwhile investments in accordance with the owners' preferences in terms of the extent of risk involvement, rate of return as well as the period of investment preferred. Without the financial market, the fund owners could not find sufficient opportunities to invest for either short term or long term. Most investments have gestation lags and of long term in character. Emergency needs may arise from time to time which cannot be easily met. It is also un-Islamic to hoard wealth. It is therefore necessary for wealth owners to invest their funds in order not to allow their funds to be unnecessarily eroded by the obligatory zakat.

Limiting the Liability

There is no objection in Shari’ah to setting up a company whose liability is limited to its capital and the company clientele knows this fact since aw areness on their part precludes deception. Nor is there any objection in Shari’ah to the fact that the liability of some shareholders is unlimited without compensation for such a commitment. A shareholder is responsible for the liability incurred by the company only to the extent of his share.

Limited companies issue shares to their subscribers, whose liability is limited to the extent of the shares held by them. This is the basic difference between a limited company and an unlimited company shareholder. In the latter, the shareholders liability to the creditors of the company is unlimited. Shareholders of the company can be physical persons, or legal persons or both. Shares of joint stock companies can be a major area for Islamic banks’ investments. The Company is deemed to have a separate entity distinct from its members. Therefore, the company has legal rights and bears liabilities. It can sue for its rights and can be sued for failing to discharge its com mitments.

Limited companies are of two types, namely, private or public. In a private limited company, the number of shareholders is usually small. In many countries, the law makes it obligatory for a limited company to invite the general public to subscribe to the company’s capital if the number of shareholders reaches a certain point, say, 50 shareholders. Then it becomes a public limited company. Whether its shares will be quoted on the Stock Exchange(s) or not is the company’s decision, subject to approval by the Stock Exchange authorities, if the share is to be quoted on Stock Exchange. 

 

Islamic Approach for the Financial Market

Like conventional markets, Islamic financial markets have two components: capital and money markets. The Islamic Financial Market (IFM) refers to the market where the financial instruments are traded in ways that do not conflict with the Shari’ah principles. In other words, the IFM represents an assertion of religious law in the financial market transactions where the market should be free from the involvement of prohibited activities by the Shari’ah.

Most of the financial instruments used in contemporary financial markets are based on interest, which is clearly prohibited in Islam. Hence, development of financial instruments whose provisions, terms and conditions do not violate Shari 'ah principles, is the first and foremost requirement towards the evolution of Islamic capital markets. Secondly, most of the practices of capital markets, in handling financial instruments may also be repugnant to both Islamic law as well as Islamic norms of morality. There is a need to review the present practices prevailing in the financial market to identify which of these practices needed to be reformed from an

Islamic point of view and which of them may be acceptable. Thirdly, institutions, which may be conducive to functioning of Islamic financial markets, need to be established.

Islam is not averse to the idea of financial intermediation. It is a fact, that whatever be the form of economic organisation, a society, may have surplus and deficit households in terms of possession of financial resources. Hence, efficient use of financial resources of the society would necessitate some form of cooperation between the surplus and deficit units.

Key features of Islamic capital market instruments

a) Instrument should represent share in equity, real assets, usufruct or a combination of some or all of these and should not earn money on debt.

1) Instrument representing real physical assets and usufruct are negotiable market price.

2) Instrument representing debts in their negotiability are subject to rules of hawalah.

3) Instrument representing a combination of different categories are subject to rules relating to the dominating.

• If debt are relatively larger the portfolio’s negotiability will be subject to hawalah-al-dayn

• If currency component is larger to sarf and

• If real / physical assets and usufructs are overwhelming, to selling at market prices.

b) The Issuance of Islamic Financial Instruments based on mudarabah or musharakah is subject to following conditions:

i) The Principle and expected return on investment cannot be guaranteed

ii) If the financial instrument were issued for specific purposes or projects, the prospectus should include full disclosure of the nature of the activities, contractual relationships and obligations between the parties involved and ratio of profit sharing; and

iii) The issuers of financial instruments should keep separate accounts for each project and must declare its profit and loss accounts at the date mentioned in the prospectus and balance sheets.

c) Holder of Islamic financial instruments are the owners of whatever rights these instruments represent and bearers of all related risks, and

d) An Instrument the object of which is debt should not be allowed to earn any return and that its negotiability/tradability must be in accordance with the shari’ah rules.

Objectives of Islamic Financial Market

In principle, the objectives of the Islamic financial market are again based on the Shari’ah, which in essence should be treated as an important and necessary vehicle to transfer funds from surplus to deficit units. This is to ensure the equitable allocation of capital to sectors which would yield the best of returns to the owners of capital and hence contribute towards the overall growth and expansion of the economy.

It is also the objective of the Islamic financial market to ensure that there exists a means of attracting surplus funds for worthwhile investments in accordance with the owners' preferences in terms of the extent of risk involvement, rate of return as well as the period of investment preferred. Without the financial market, the fund owners could not find sufficient opportunities to invest for either short term or long term. Most investments have gestation lags and of long term in character. Emergency needs may arise from time to time which cannot be easily met. It is also un-Islamic to hoard wealth. It is therefore necessary for wealth owners to invest their funds in order not to allow their funds to be unnecessarily eroded by the obligatory zakat.

Limiting the Liability

There is no objection in Shari’ah to setting up a company whose liability is limited to its capital and the company clientele knows this fact since awareness on their part precludes deception. Nor is there any objection in Shari’ah to the fact that the liability of some shareholders is unlimited without compensation for such a commitment. A shareholder is responsible for the liability incurred by the company only to the extent of his share.

Limited companies issue shares to their subscribers, whose liability is limited to the extent of the shares held by them. This is the basic difference between a limited company and an unlimited company shareholder. In the latter, the shareholders liability to the creditors of the company is unlimited. Shareholders of the company can be physical persons, or legal persons or both. Shares of joint stock companies can be a major area for Islamic banks’ investments. The Company is deemed to have a separate entity distinct from its members. Therefore, the company has legal rights and bears liabilities. It can sue for its rights and can be sued for failing to discharge its commitments.

Limited companies are of two types, namely, private or public. In a private limited company, the number of shareholders is usually small. In many countries, the law makes it obligatory for a limited company to invite the general public to subscribe to the company’s capital if the number of shareholders reaches a certain point, say, 50 shareholders. Then it becomes a public limited company. Whether its shares will be quoted on the Stock Exchange(s) or not is the company’s decision, subject to approval by the Stock Exchange authorities, if the share is to be quoted on Stock Exchange.