The Islamic Capital Market - dummies

By Consumer Dummies

The term capital market refers to any financial market where debt and equity are demanded and supplied. A capital market helps investors find a platform for making their investments and helps both borrowers and investors by channeling funds from those with excess funds to those in need of such funds. Businesses and governments raise funds in the capital market.

Simply put, the Islamic capital market is where sharia-compliant financial assets are transacted. It works parallel to the conventional market and helps investors find sharia-compliant investment opportunities. The following sections list exchanges and liquidity issues in the Islamic capital market.

The increase of wealth among Muslim investors (especially from nations that are part of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) is spurring growth in the Islamic capital market. The market’s current growth is between 12 and 15 percent annually. In total, Islamic assets are worth an estimated $1 trillion at the time of this writing, and about 25 percent of that amount is tied to the Islamic capital market.

How to identify exchanges on the Islamic capital market

Where, exactly, is the Islamic capital market located? In many of the same places you’d find the conventional capital market. Islamic capital market instruments are traded on many of the world’s leading exchanges (where conventional market instruments are traded as well).

The following table lists six of the many exchanges that currently trade Islamic capital market instruments. Right now, no Islamic-only exchanges exist.

Market Description Securities Traded
Bursa Malaysia (MYX) An exchange holding company that lists almost 1,000
Sukuk, sharia-compliant equities, IETFs, IREITs, as well as
conventional capital market products such as equities, derivatives,
and bonds
Labuan International Financial Exchange (LFX) A Malaysian-based offshore exchange, launched in 2000 and
operating 24/7
Sukuk, Islamic funds
London Stock Exchange (LSE) One of the largest stock exchanges in the world; also owner of
the Alternative Investment Market (AIM), which includes on its list
sharia-compliant companies
Sukuk, equity funds, and IETFs
Luxembourg Stock Exchange The first European exchange to issue sukuk (the Islamic version
of bonds — certificates sold to investors that represent
ownership in a tangible asset, service, project, business, or joint
Sukuk, sharia-compliant funds
NASDAQ Dubai A capital market exchange serving the West, Middle East,
Europe, and East Asia; considered the largest exchange for sukuk in
the Middle East
Sharia-compliant equities (stocks), Islamic funds (mutual funds
and unit trusts), Islamic exchange-traded funds (IETFs), Islamic
real estate investment trusts (IREITs)
Tadawul (the Saudi Arabian stock exchange) The only stock exchange in Saudi Arabia; lists companies
operating in various industries, including oil and gas,
agriculture, food, technology, banking, and other financial
Equities, IETFs, sukuk, and mutual funds

Capital markets must be supervised and controlled by regulatory bodies. Because the Islamic capital market is in its infant stage, no organized regulatory authority exists for it. Generally, the conventional capital market authority in any given country or region supervises the Islamic capital market as well. In Malaysia, where the Islamic capital market first got its legs, the Securities Commission of Malaysia has a sharia council that is specifically responsible for sharia-related matters of Islamic capital market activities (sharia councils are religious boards steeped in the knowledge of Islam and responsible for determining whether an institution’s practices and products comply with Islamic principles). In time, regulatory agencies in other nations where the Islamic capital markets are thriving may follow suit.

How to recognize liquidity issues in the Islamic capital market

Like all investors, people investing in Islamic assets need to manage liquidity so they can feel confident about meeting their current and future financial obligations. However, investors in the Islamic capital market face two issues that investors in conventional assets don’t face:

  • Islamic product development is slow compared to conventional product development. As a result, Islamic investors don’t have as many highly liquid investment options as conventional investors do. This delay exists for two reasons:

    • The market share for Islamic investments is still small compared to the conventional capital markets.

    • Islamic investments must comply with sharia, which requires screening processes and debate among scholars that can be quite time-consuming.

  • Investors sometimes lack access to the Islamic capital market. For example, because of a lack of financial infrastructure, a customer in Canada may not be able to access the U.S. Islamic asset market as easily as she can access the conventional market. If she lacks market access, she lacks the ability to turn her investments into cash as quickly as she can in the conventional markets.