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KembaraXtra-Islamic Finance-Islamic Capital Market -Objectives of the Stock Market
– Stock markets serve two primary functional purposes: raising capital for companies and creating profit opportunities for investors.
• Providing Capital to Companies
– Stock markets enable companies to raise funds by issuing shares to the public.
– When a company sells shares, it receives capital that can be used for business expansion, investment, and growth.
– Example:
– A company issues shares worth $1 million at $10 per share.
– This results in $10 million of capital raised for the company.
– The share issuance process is usually managed by an investment bank.
– The investment bank charges a standard fee, which is deducted from the total capital raised.
– Stock markets provide an alternative to bank borrowing.
– Companies can raise funds without taking loans and without the burden of interest payments.
– Issuing shares reduces financial pressure compared to debt financing.
• Providing Profit Opportunities to Investors
– Stock markets allow investors to participate in the profits of publicly listed companies.
– Investors benefit from stock ownership in two main ways:
• Dividend Income
– Some companies distribute profits to shareholders in the form of dividends.
– Dividends provide regular income per share owned.
– The total dividend earned depends on the number of shares held.
• Capital Gains
– Investors can earn profits by selling shares at a higher price than the purchase price.
– Example:
– An investor buys a share at $10 per share.
– The investor sells the share later at $15 per share.
– This results in a 50% profit on the original investment.
– Capital gains motivate investors to participate actively in stock markets.
• Overall Importance
– By linking companies needing funds with investors seeking returns, stock markets play a crucial role in economic development.
– They support business growth, investment activity, and wealth creation in the economy.
– Stock markets serve two primary functional purposes: raising capital for companies and creating profit opportunities for investors.
• Providing Capital to Companies
– Stock markets enable companies to raise funds by issuing shares to the public.
– When a company sells shares, it receives capital that can be used for business expansion, investment, and growth.
– Example:
– A company issues shares worth $1 million at $10 per share.
– This results in $10 million of capital raised for the company.
– The share issuance process is usually managed by an investment bank.
– The investment bank charges a standard fee, which is deducted from the total capital raised.
– Stock markets provide an alternative to bank borrowing.
– Companies can raise funds without taking loans and without the burden of interest payments.
– Issuing shares reduces financial pressure compared to debt financing.
• Providing Profit Opportunities to Investors
– Stock markets allow investors to participate in the profits of publicly listed companies.
– Investors benefit from stock ownership in two main ways:
• Dividend Income
– Some companies distribute profits to shareholders in the form of dividends.
– Dividends provide regular income per share owned.
– The total dividend earned depends on the number of shares held.
• Capital Gains
– Investors can earn profits by selling shares at a higher price than the purchase price.
– Example:
– An investor buys a share at $10 per share.
– The investor sells the share later at $15 per share.
– This results in a 50% profit on the original investment.
– Capital gains motivate investors to participate actively in stock markets.
• Overall Importance
– By linking companies needing funds with investors seeking returns, stock markets play a crucial role in economic development.
– They support business growth, investment activity, and wealth creation in the economy.
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KembaraXtra-Islamic Finance-Islamic Capital Market -Contemporary Stock Trading: The Shifting Face of Worldwide Stock Exchanges
– Over more than two centuries, the New York Stock Exchange (NYSE) dominated stock trading within the United States.
– The growth of the NYSE closely mirrored the simultaneous expansion of the US economy, making it a global financial leader.
– In Europe, the London Stock Exchange (LSE) emerged as the dominant stock exchange for European equity trading.
– As stock markets developed, the NYSE became home to an increasing number of large multinational companies, strengthening its global influence.
– Following the success of the NYSE and LSE, countries such as France and Germany established their own stock exchanges, largely modelled on the structures and practices of these leading exchanges.
– During the 20th century, stock trading expanded further with the rise of new exchanges, most notably NASDAQ.
– NASDAQ became especially attractive to rapidly growing technology companies, which preferred its market structure.
– The technology boom of the 1980s and 1990s significantly increased NASDAQ’s importance and global relevance.
– NASDAQ was the first exchange to implement fully electronic trading, using a network of computers rather than physical trading floors.
– Electronic trading improved efficiency, significantly reducing trading time and transaction costs.
– The growing popularity of NASDAQ, along with the rise of stock exchanges in Asia’s major financial hubs—including Beijing, Malaysia, Hong Kong, and Tokyo—created intense competition for the NYSE.
– To remain competitive, the NYSE pursued strategic integration.
– In 2000, Euronext was formed through the merger of the Brussels, Amsterdam, and Paris stock exchanges.
– In 2007, the NYSE merged with Euronext to form NYSE/Euronext.
– This merger is recognised as the first transatlantic stock exchange, symbolising the globalisation and consolidation of stock markets worldwide.
One-Line Exam Answer
Contemporary stock trading has evolved from nationally dominant exchanges like the NYSE and LSE to globally competitive, electronically driven markets, marked by the rise of NASDAQ, Asian exchanges, and cross-border mergers such as NYSE/Euronext.
– Over more than two centuries, the New York Stock Exchange (NYSE) dominated stock trading within the United States.
– The growth of the NYSE closely mirrored the simultaneous expansion of the US economy, making it a global financial leader.
– In Europe, the London Stock Exchange (LSE) emerged as the dominant stock exchange for European equity trading.
– As stock markets developed, the NYSE became home to an increasing number of large multinational companies, strengthening its global influence.
– Following the success of the NYSE and LSE, countries such as France and Germany established their own stock exchanges, largely modelled on the structures and practices of these leading exchanges.
– During the 20th century, stock trading expanded further with the rise of new exchanges, most notably NASDAQ.
– NASDAQ became especially attractive to rapidly growing technology companies, which preferred its market structure.
– The technology boom of the 1980s and 1990s significantly increased NASDAQ’s importance and global relevance.
– NASDAQ was the first exchange to implement fully electronic trading, using a network of computers rather than physical trading floors.
– Electronic trading improved efficiency, significantly reducing trading time and transaction costs.
– The growing popularity of NASDAQ, along with the rise of stock exchanges in Asia’s major financial hubs—including Beijing, Malaysia, Hong Kong, and Tokyo—created intense competition for the NYSE.
– To remain competitive, the NYSE pursued strategic integration.
– In 2000, Euronext was formed through the merger of the Brussels, Amsterdam, and Paris stock exchanges.
– In 2007, the NYSE merged with Euronext to form NYSE/Euronext.
– This merger is recognised as the first transatlantic stock exchange, symbolising the globalisation and consolidation of stock markets worldwide.
One-Line Exam Answer
Contemporary stock trading has evolved from nationally dominant exchanges like the NYSE and LSE to globally competitive, electronically driven markets, marked by the rise of NASDAQ, Asian exchanges, and cross-border mergers such as NYSE/Euronext.
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KembaraXtra-Islamic Finance-Islamic Capital Market-Stock Market Indexes
– Stock market indexes are used as indicators to track, analyse, and understand the overall performance of the stock market.
– They provide a simplified way to observe how a group of stocks performs collectively, rather than analysing individual stocks one by one.
– A stock market index is constructed using a selected group of representative stocks.
– These selected stocks act as a benchmark or performance indicator for the broader market or a specific segment of the market.
– Changes in the index value reflect movements in stock prices, helping investors gauge market trends.
– Stock market indexes are not only used for analysis but are also financially tradable instruments.
– Trading of stock market indexes occurs through:
– Indexes help investors and policymakers:
– Some of the major conventional and Islamic stock market indexes include:
– Islamic stock indexes consist only of Shari’ah-compliant companies, excluding businesses involved in prohibited activities and interest-based income beyond acceptable thresholds.
One-Line Exam Answer
Stock market indexes are benchmark indicators made up of selected stocks that measure market performance and are also traded through futures and options on regulated exchanges.
– Stock market indexes are used as indicators to track, analyse, and understand the overall performance of the stock market.
– They provide a simplified way to observe how a group of stocks performs collectively, rather than analysing individual stocks one by one.
– A stock market index is constructed using a selected group of representative stocks.
– These selected stocks act as a benchmark or performance indicator for the broader market or a specific segment of the market.
– Changes in the index value reflect movements in stock prices, helping investors gauge market trends.
– Stock market indexes are not only used for analysis but are also financially tradable instruments.
– Trading of stock market indexes occurs through:
- Options
- Futures contracts
– These index-based derivatives are traded on regulated exchanges, allowing investors to hedge risk or speculate on market movements.
– Indexes help investors and policymakers:
- compare market performance over time
- assess economic conditions
- evaluate investment strategies
– Some of the major conventional and Islamic stock market indexes include:
- Dow Jones Industrial Average (DJIA)
- Dow Jones Islamic Market Index
- S&P 500
- S&P Islamic Index
- FTSE 100
- FTSE Global Islamic Index
- Nikkei 225
- NASDAQ Composite
- Hang Seng Index
– Islamic stock indexes consist only of Shari’ah-compliant companies, excluding businesses involved in prohibited activities and interest-based income beyond acceptable thresholds.
One-Line Exam Answer
Stock market indexes are benchmark indicators made up of selected stocks that measure market performance and are also traded through futures and options on regulated exchanges.
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KembaraXtra-Islamic Finance-Islamic Capital Market -Bull and Bear Markets
– Bull and bear markets represent two fundamental trading ideologies used to describe overall market conditions.
• Bull Market
– A bull market is characterised by a general and sustained rise in stock prices.
– Rising prices indicate positive market sentiment and economic confidence.
– Most investors in a bull market act as buyers rather than sellers.
– Short selling activity is relatively low compared to buying activity.
– Investors are optimistic about future performance and expect prices to continue increasing.
– This type of market is associated with prosperity for investors, as portfolios tend to grow in value.
– Bull markets often occur during periods of economic growth, strong corporate earnings, and high investor confidence.
– Example: Investors buy shares expecting to sell them later at higher prices.
• Bear Market
– A bear market is characterised by a consistent and prolonged decline in stock prices.
– Falling prices reflect negative market sentiment and pessimism among investors.
– Investors are more likely to sell shares or avoid buying, fearing further losses.
– Short selling becomes more common as traders try to profit from falling prices.
– Bear markets are usually associated with economic slowdown, weak earnings, or financial crises.
– Investors generally experience losses or reduced portfolio values during this phase.
– Example: Investors sell shares to avoid further price declines or short-sell to profit from falling prices.
One-Line Exam Answer
A bull market refers to a period of rising stock prices dominated by buyers and optimism, while a bear market refers to a period of falling stock prices marked by pessimism and increased selling activity.
– Bull and bear markets represent two fundamental trading ideologies used to describe overall market conditions.
• Bull Market
– A bull market is characterised by a general and sustained rise in stock prices.
– Rising prices indicate positive market sentiment and economic confidence.
– Most investors in a bull market act as buyers rather than sellers.
– Short selling activity is relatively low compared to buying activity.
– Investors are optimistic about future performance and expect prices to continue increasing.
– This type of market is associated with prosperity for investors, as portfolios tend to grow in value.
– Bull markets often occur during periods of economic growth, strong corporate earnings, and high investor confidence.
– Example: Investors buy shares expecting to sell them later at higher prices.
• Bear Market
– A bear market is characterised by a consistent and prolonged decline in stock prices.
– Falling prices reflect negative market sentiment and pessimism among investors.
– Investors are more likely to sell shares or avoid buying, fearing further losses.
– Short selling becomes more common as traders try to profit from falling prices.
– Bear markets are usually associated with economic slowdown, weak earnings, or financial crises.
– Investors generally experience losses or reduced portfolio values during this phase.
– Example: Investors sell shares to avoid further price declines or short-sell to profit from falling prices.
One-Line Exam Answer
A bull market refers to a period of rising stock prices dominated by buyers and optimism, while a bear market refers to a period of falling stock prices marked by pessimism and increased selling activity.
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KembaraXtra-Islamic Finance-Islamic Capital Market -Short Selling
– Short selling is a trading strategy mainly used in bear markets, where investors expect stock prices to fall.
– It allows investors to make profits from declining stock prices, rather than rising prices.
• Basic Idea of Short Selling
– The investor borrows shares of a stock from a broker.
– The borrowed shares are sold immediately in the secondary market at the current market price.
– The investor receives cash from this sale.
– Later, when the stock price falls, the investor buys the same number of shares at the lower price.
– These newly purchased shares are returned to the broker.
– The difference between the selling price and the buying price becomes the investor’s profit.
• Role of the Broker and Margin
– Shares are borrowed through a broker, not owned by the investor.
– The investor must place a margin deposit with the broker as security.
– This margin protects the broker in case the stock price rises instead of falling.
• How Profit Is Made
– Profit arises because the investor sells the shares at a higher price and buys them back at a lower price.
– If prices fall as expected, short selling is profitable.
– If prices rise instead, the investor incurs losses.
• Numerical Example
– Stock price of Company A = US$20 per share.
– Investor expects the price to fall.
– Investor borrows 100 shares from the broker after placing a margin deposit.
– Investor sells the 100 shares at US$20 per share, receiving US$2,000.
– Later, the stock price falls to US$10 per share.
– Investor buys 100 shares at US$10 per share, paying US$1,000.
– Investor returns the 100 shares to the broker.
– Profit = US$2,000 − US$1,000 = US$1,000.
• Risk Aspect
– Short selling involves high risk.
– If the stock price rises instead of falling, losses can be unlimited, as there is no upper limit to how high a stock price can rise.
One-Line Exam Answer
Short selling is a strategy in which an investor borrows shares, sells them at the current price, and later repurchases them at a lower price to return to the broker, earning profit from the price decline.
– Short selling is a trading strategy mainly used in bear markets, where investors expect stock prices to fall.
– It allows investors to make profits from declining stock prices, rather than rising prices.
• Basic Idea of Short Selling
– The investor borrows shares of a stock from a broker.
– The borrowed shares are sold immediately in the secondary market at the current market price.
– The investor receives cash from this sale.
– Later, when the stock price falls, the investor buys the same number of shares at the lower price.
– These newly purchased shares are returned to the broker.
– The difference between the selling price and the buying price becomes the investor’s profit.
• Role of the Broker and Margin
– Shares are borrowed through a broker, not owned by the investor.
– The investor must place a margin deposit with the broker as security.
– This margin protects the broker in case the stock price rises instead of falling.
• How Profit Is Made
– Profit arises because the investor sells the shares at a higher price and buys them back at a lower price.
– If prices fall as expected, short selling is profitable.
– If prices rise instead, the investor incurs losses.
• Numerical Example
– Stock price of Company A = US$20 per share.
– Investor expects the price to fall.
– Investor borrows 100 shares from the broker after placing a margin deposit.
– Investor sells the 100 shares at US$20 per share, receiving US$2,000.
– Later, the stock price falls to US$10 per share.
– Investor buys 100 shares at US$10 per share, paying US$1,000.
– Investor returns the 100 shares to the broker.
– Profit = US$2,000 − US$1,000 = US$1,000.
• Risk Aspect
– Short selling involves high risk.
– If the stock price rises instead of falling, losses can be unlimited, as there is no upper limit to how high a stock price can rise.
One-Line Exam Answer
Short selling is a strategy in which an investor borrows shares, sells them at the current price, and later repurchases them at a lower price to return to the broker, earning profit from the price decline.
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KembaraXtra-Islamic Finance-Islamic Capital Market-Two Basic Strategies: Value Investing and Growth Investing
– Investors and analysts use many methods to select stocks, but all stock-picking approaches broadly fall into two main strategies:
– Value investing
– Growth investing
– These two strategies differ mainly in risk level, company type, return expectation, and investment focus.
• Value Investing
– Value investing focuses on well-established and mature companies.
– These companies usually have:
– a long operating history
– consistent and stable profits over time
– Value investors often prefer companies that pay regular dividends, providing steady income.
– The core idea is to identify stocks that are undervalued by the market.
– An undervalued stock means:
– its market price is lower than its perceived true or intrinsic value
– Value investors aim to buy shares at a bargain price and benefit when the market corrects the undervaluation.
– This strategy is considered less risky compared to growth investing.
– Returns come mainly from:
– dividend income
– moderate capital appreciation
– Value investing appeals to investors who prefer stability and lower risk.
• Growth Investing
– Growth investing focuses on companies with high future growth potential.
– These companies are often:
– relatively young
– operating in fast-growing sectors
– Growth investors seek companies capable of rapid expansion and increasing market share.
– The main objective is maximum appreciation in share price, not dividend income.
– Growth companies usually:
– reinvest profits back into the business
– pay little or no dividends
– This strategy involves higher risk, as future growth is uncertain.
– Growth investors willingly accept risk in anticipation of exponential price growth.
– Common sectors for growth investing include:
– technology
– construction
– innovative and emerging industries
– Returns depend largely on capital gains from rising stock prices.
• Key Difference in Focus
– Value investing prioritises:
– stability
– undervaluation
– dividends
– Growth investing prioritises:
– future potential
– innovation
– rapid price appreciation
One-Line Exam Answer
Value investing focuses on undervalued, established companies with stable profits and dividends, while growth investing targets high-potential companies with expectations of rapid share price appreciation despite higher risk.
– Investors and analysts use many methods to select stocks, but all stock-picking approaches broadly fall into two main strategies:
– Value investing
– Growth investing
– These two strategies differ mainly in risk level, company type, return expectation, and investment focus.
• Value Investing
– Value investing focuses on well-established and mature companies.
– These companies usually have:
– a long operating history
– consistent and stable profits over time
– Value investors often prefer companies that pay regular dividends, providing steady income.
– The core idea is to identify stocks that are undervalued by the market.
– An undervalued stock means:
– its market price is lower than its perceived true or intrinsic value
– Value investors aim to buy shares at a bargain price and benefit when the market corrects the undervaluation.
– This strategy is considered less risky compared to growth investing.
– Returns come mainly from:
– dividend income
– moderate capital appreciation
– Value investing appeals to investors who prefer stability and lower risk.
• Growth Investing
– Growth investing focuses on companies with high future growth potential.
– These companies are often:
– relatively young
– operating in fast-growing sectors
– Growth investors seek companies capable of rapid expansion and increasing market share.
– The main objective is maximum appreciation in share price, not dividend income.
– Growth companies usually:
– reinvest profits back into the business
– pay little or no dividends
– This strategy involves higher risk, as future growth is uncertain.
– Growth investors willingly accept risk in anticipation of exponential price growth.
– Common sectors for growth investing include:
– technology
– construction
– innovative and emerging industries
– Returns depend largely on capital gains from rising stock prices.
• Key Difference in Focus
– Value investing prioritises:
– stability
– undervaluation
– dividends
– Growth investing prioritises:
– future potential
– innovation
– rapid price appreciation
One-Line Exam Answer
Value investing focuses on undervalued, established companies with stable profits and dividends, while growth investing targets high-potential companies with expectations of rapid share price appreciation despite higher risk.
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KembaraXtra-Islamic Finance-Islamic Capital Market-Summary
– Navigating financial markets is often challenging for investors, regardless of whether they are experienced traders or newcomers.
– Financial markets operate through self-sustaining mechanisms, each developing its own independent methods and structures.
– The large size and massive trading volumes of these markets add to their complexity.
– Complex structures and varied operational approaches can appear intimidating to investors.
– However, this complexity should not discourage participation in financial markets.
– To become an efficient and informed investor, one must:
– A clear understanding of the fundamentals of market operations helps investors:
– Investors who perform proper due diligence today are better positioned to enjoy financial stability and confidence in the future.
– The differences between the primary market and secondary market should:
– Islamic financial markets do not operate with a completely separate primary market system.
– Instead, Islamic markets rely on the conventional primary market structure for:
– Liquidity plays a critical role in ensuring the efficiency of the Islamic secondary market.
– Adequate liquidity supports:
– Islamic financial institutions face ongoing liquidity challenges in secondary markets due to:
– The suspension of short-term Sukuk issuance in some jurisdictions (e.g. Malaysia in 2015) negatively affected secondary market liquidity.
– Financial architecture and infrastructure are crucial for strengthening Islamic secondary markets.
– Greater international integration and focus can help deepen market liquidity.
– Islamic financial contracts, which form the backbone of Islamic finance, need:
– Addressing these structural and regulatory challenges can enhance the depth, credibility, and long-term sustainability of Islamic financial markets.
– Navigating financial markets is often challenging for investors, regardless of whether they are experienced traders or newcomers.
– Financial markets operate through self-sustaining mechanisms, each developing its own independent methods and structures.
– The large size and massive trading volumes of these markets add to their complexity.
– Complex structures and varied operational approaches can appear intimidating to investors.
– However, this complexity should not discourage participation in financial markets.
– To become an efficient and informed investor, one must:
- take time to understand how different market structures function
- study market dynamics patiently
- avoid impulsive, hype-driven decision-making (“hustle culture”)
– A clear understanding of the fundamentals of market operations helps investors:
- build strong foundational knowledge
- design resilient and well-balanced investment portfolios
– Investors who perform proper due diligence today are better positioned to enjoy financial stability and confidence in the future.
– The differences between the primary market and secondary market should:
- not lead to confusion or debate
- instead be viewed as complementary learning opportunities within the financial system
– Islamic financial markets do not operate with a completely separate primary market system.
– Instead, Islamic markets rely on the conventional primary market structure for:
- issuing common stocks
- issuing Sukuk (Islamic bonds)
– Liquidity plays a critical role in ensuring the efficiency of the Islamic secondary market.
– Adequate liquidity supports:
- smooth allocation of capital and risk
- productive use of economic resources
- accurate pricing
- effective dissemination of issuer-specific information
– Islamic financial institutions face ongoing liquidity challenges in secondary markets due to:
- scarcity of high-quality liquid assets
- underdeveloped secondary markets for Sukuk
- commercial constraints
- strict Shari’ah compliance requirements
– The suspension of short-term Sukuk issuance in some jurisdictions (e.g. Malaysia in 2015) negatively affected secondary market liquidity.
– Financial architecture and infrastructure are crucial for strengthening Islamic secondary markets.
– Greater international integration and focus can help deepen market liquidity.
– Islamic financial contracts, which form the backbone of Islamic finance, need:
- further refinement
- harmonisation
- resolution of structuring issues caused by lack of Shari’ah consensus
– Addressing these structural and regulatory challenges can enhance the depth, credibility, and long-term sustainability of Islamic financial markets.
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KembaraXtra-Islamic Finance-Islamic Capital Market-Introduction to Capital Markets
– A capital market is a financial market where stocks, bonds, and similar securities are issued and traded to raise long-term capital.
– The term capital market broadly refers to any market in which debt and equity instruments are supplied and demanded.
– Capital markets provide a platform for investors to invest their surplus funds.
– They facilitate the flow of funds from surplus units (investors) to deficit units (borrowers).
– Both companies and governments use capital markets as a source of long-term financing.
• Islamic Capital Market (ICM)
– An Islamic capital market is a market where only Shari’ah-compliant financial assets are transacted.
– It operates parallel to the conventional capital market, offering an alternative investment avenue.
– The ICM enables investors to access investment opportunities that comply with Islamic principles.
• Structure of the Islamic Capital Market
– The Islamic capital market is divided into:
– Debt capital markets (e.g. Sukuk)
– Equity capital markets (Shari’ah-compliant shares)
– It is further classified into:
– Primary markets, where securities are issued for the first time
– Secondary markets, where existing securities are bought and sold
• Primary and Secondary Markets in ICM
– In the primary market, investors purchase newly issued securities directly from issuers.
– Islamic primary capital markets play an important role in economic and capital development, similar to conventional markets.
– In the secondary market, existing Islamic securities are traded among investors.
– Secondary markets provide liquidity, price discovery, and investment flexibility.
• Shari’ah Compliance in ICM Operations
– All ICM operations must comply with Islamic business ethics.
– The market is free from activities prohibited under Shari’ah, including:
– Riba (usury or interest)
– Maisir (gambling or speculation)
– Gharar (excessive uncertainty or ambiguity)
• Role of ICM in the Islamic Financial System
– The Islamic capital market is a core component of the overall Islamic financial system.
– It contributes significantly to economic growth and development.
– The ICM complements the Islamic banking system by expanding the range of Shari’ah-compliant financial instruments.
– It helps in broadening and deepening Islamic financial markets globally.
• Growth and Global Significance of ICM
– Rising wealth among Muslim investors, particularly from Gulf Cooperation Council (GCC) countries, has driven ICM growth.
– The current growth rate of Islamic capital market products is estimated at 12%–15% annually.
– The ICM accounts for approximately 27% of global Islamic financial assets, valued at about US$591.9 billion.
• Role of Sukuk in the ICM
– Sukuk (Islamic bonds) dominate the Islamic capital market sector.
– Despite slower growth in 2018 compared to 2017, Sukuk issuance remained strong due to:
– sovereign issuances
– multilateral issuances
– funding needs for government budgetary expenditures
– new issuances in emerging jurisdictions
• Comparison with Global Equity Markets
– In contrast to Sukuk performance, Islamic equity funds declined by 8.5% in 2018 compared to 2017.
– This decline was attributed to:
– slower global economic growth
– persistent geopolitical challenges
– tightening international liquidity conditions
• Overall Size of the Islamic Capital Market
– Total global Islamic financial assets are estimated at US$1.5 trillion.
– Approximately 25% of these assets were tied to the Islamic capital market as of 2019.
One-Line Exam Answer
The Islamic capital market is a Shari’ah-compliant segment of the capital market that facilitates long-term financing through equity and Sukuk instruments while supporting economic growth and complementing Islamic banking.
– A capital market is a financial market where stocks, bonds, and similar securities are issued and traded to raise long-term capital.
– The term capital market broadly refers to any market in which debt and equity instruments are supplied and demanded.
– Capital markets provide a platform for investors to invest their surplus funds.
– They facilitate the flow of funds from surplus units (investors) to deficit units (borrowers).
– Both companies and governments use capital markets as a source of long-term financing.
• Islamic Capital Market (ICM)
– An Islamic capital market is a market where only Shari’ah-compliant financial assets are transacted.
– It operates parallel to the conventional capital market, offering an alternative investment avenue.
– The ICM enables investors to access investment opportunities that comply with Islamic principles.
• Structure of the Islamic Capital Market
– The Islamic capital market is divided into:
– Debt capital markets (e.g. Sukuk)
– Equity capital markets (Shari’ah-compliant shares)
– It is further classified into:
– Primary markets, where securities are issued for the first time
– Secondary markets, where existing securities are bought and sold
• Primary and Secondary Markets in ICM
– In the primary market, investors purchase newly issued securities directly from issuers.
– Islamic primary capital markets play an important role in economic and capital development, similar to conventional markets.
– In the secondary market, existing Islamic securities are traded among investors.
– Secondary markets provide liquidity, price discovery, and investment flexibility.
• Shari’ah Compliance in ICM Operations
– All ICM operations must comply with Islamic business ethics.
– The market is free from activities prohibited under Shari’ah, including:
– Riba (usury or interest)
– Maisir (gambling or speculation)
– Gharar (excessive uncertainty or ambiguity)
• Role of ICM in the Islamic Financial System
– The Islamic capital market is a core component of the overall Islamic financial system.
– It contributes significantly to economic growth and development.
– The ICM complements the Islamic banking system by expanding the range of Shari’ah-compliant financial instruments.
– It helps in broadening and deepening Islamic financial markets globally.
• Growth and Global Significance of ICM
– Rising wealth among Muslim investors, particularly from Gulf Cooperation Council (GCC) countries, has driven ICM growth.
– The current growth rate of Islamic capital market products is estimated at 12%–15% annually.
– The ICM accounts for approximately 27% of global Islamic financial assets, valued at about US$591.9 billion.
• Role of Sukuk in the ICM
– Sukuk (Islamic bonds) dominate the Islamic capital market sector.
– Despite slower growth in 2018 compared to 2017, Sukuk issuance remained strong due to:
– sovereign issuances
– multilateral issuances
– funding needs for government budgetary expenditures
– new issuances in emerging jurisdictions
• Comparison with Global Equity Markets
– In contrast to Sukuk performance, Islamic equity funds declined by 8.5% in 2018 compared to 2017.
– This decline was attributed to:
– slower global economic growth
– persistent geopolitical challenges
– tightening international liquidity conditions
• Overall Size of the Islamic Capital Market
– Total global Islamic financial assets are estimated at US$1.5 trillion.
– Approximately 25% of these assets were tied to the Islamic capital market as of 2019.
One-Line Exam Answer
The Islamic capital market is a Shari’ah-compliant segment of the capital market that facilitates long-term financing through equity and Sukuk instruments while supporting economic growth and complementing Islamic banking.
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KembaraXtra-Islamic Finance-Islamic Capital Market- Capital Market (ICM)
– The Islamic capital market is a financial market for Shari’ah-compliant financial assets.
– It facilitates the issuance, trading, and investment of Islamic debt and equity instruments.
– The ICM mobilises long-term funds for economic development while adhering to Islamic principles.
– It enables financing for large-scale projects such as factories, highways, schools, hospitals, and other infrastructure.
– The main borrowers in the ICM are businesses and governments that issue long-term instruments representing claims on future revenues.
• Overall Structure of the Islamic Capital Market
– The ICM is broadly divided into two main market segments:
– Equity Market
– Sukuk Market
– These segments operate within a framework supported by intermediaries and complementary instruments.
• Equity Market
– The Islamic equity market deals with Shari’ah-compliant shares and quasi-equity instruments.
– Shares represent ownership in companies that comply with Islamic business and financial screening criteria.
– Investors earn returns through dividends and capital gains, subject to Shari’ah rules.
– Equity financing supports long-term capital formation and corporate expansion.
• Islamic Stockbroking
– Islamic stockbroking acts as an intermediary between investors and the equity market.
– It facilitates the buying and selling of Shari’ah-compliant shares.
– Stockbrokers ensure that transactions are free from riba (interest), gharar (excessive uncertainty), and maisir (gambling).
– Islamic stockbroking provides market access and ensures ethical trading practices.
– It also connects with Shari’ah-compliant derivatives for risk management purposes.
• Sukuk Market
– The Sukuk market represents the debt segment of the Islamic capital market.
– Sukuk are Shari’ah-compliant alternatives to conventional bonds.
– They represent ownership in underlying assets, usufructs, or projects, rather than interest-based debt.
– Returns to investors are generated from asset performance, rental income, or profit-sharing.
– Sukuk are issued by governments, corporations, and multilateral institutions to raise long-term funds.
• Islamic Structured Products
– Islamic structured products are customised financial instruments developed using multiple Shari’ah-compliant contracts.
– They are closely linked to the Sukuk market.
– These products are designed to meet specific investment or financing objectives.
– They allow flexibility in risk-return profiles while maintaining Shari’ah compliance.
– Islamic structured products enhance financial innovation within the ICM.
• Shari’ah-Compliant Derivatives
– Shari’ah-compliant derivatives are used for hedging and risk management, not speculation.
– They operate in accordance with Islamic legal and ethical principles.
– These derivatives interact with:
– Islamic stockbroking (for equity-related risk management)
– Islamic structured products (for Sukuk-related risk management)
– Their purpose is to reduce exposure to market risks while avoiding prohibited elements.
• Products in the Islamic Capital Market
– The main products traded within the ICM include:
• Role and Importance of the ICM
– The ICM functions as a component of the overall Islamic financial system.
– It operates parallel to the conventional capital market while remaining Shari’ah-compliant.
– It complements Islamic banking by expanding investment and financing options.
– The ICM supports ethical, risk-sharing, and asset-backed financing.
– It contributes to sustainable economic growth and global development of Islamic finance.
– The Islamic capital market is a financial market for Shari’ah-compliant financial assets.
– It facilitates the issuance, trading, and investment of Islamic debt and equity instruments.
– The ICM mobilises long-term funds for economic development while adhering to Islamic principles.
– It enables financing for large-scale projects such as factories, highways, schools, hospitals, and other infrastructure.
– The main borrowers in the ICM are businesses and governments that issue long-term instruments representing claims on future revenues.
• Overall Structure of the Islamic Capital Market
– The ICM is broadly divided into two main market segments:
– Equity Market
– Sukuk Market
– These segments operate within a framework supported by intermediaries and complementary instruments.
• Equity Market
– The Islamic equity market deals with Shari’ah-compliant shares and quasi-equity instruments.
– Shares represent ownership in companies that comply with Islamic business and financial screening criteria.
– Investors earn returns through dividends and capital gains, subject to Shari’ah rules.
– Equity financing supports long-term capital formation and corporate expansion.
• Islamic Stockbroking
– Islamic stockbroking acts as an intermediary between investors and the equity market.
– It facilitates the buying and selling of Shari’ah-compliant shares.
– Stockbrokers ensure that transactions are free from riba (interest), gharar (excessive uncertainty), and maisir (gambling).
– Islamic stockbroking provides market access and ensures ethical trading practices.
– It also connects with Shari’ah-compliant derivatives for risk management purposes.
• Sukuk Market
– The Sukuk market represents the debt segment of the Islamic capital market.
– Sukuk are Shari’ah-compliant alternatives to conventional bonds.
– They represent ownership in underlying assets, usufructs, or projects, rather than interest-based debt.
– Returns to investors are generated from asset performance, rental income, or profit-sharing.
– Sukuk are issued by governments, corporations, and multilateral institutions to raise long-term funds.
• Islamic Structured Products
– Islamic structured products are customised financial instruments developed using multiple Shari’ah-compliant contracts.
– They are closely linked to the Sukuk market.
– These products are designed to meet specific investment or financing objectives.
– They allow flexibility in risk-return profiles while maintaining Shari’ah compliance.
– Islamic structured products enhance financial innovation within the ICM.
• Shari’ah-Compliant Derivatives
– Shari’ah-compliant derivatives are used for hedging and risk management, not speculation.
– They operate in accordance with Islamic legal and ethical principles.
– These derivatives interact with:
– Islamic stockbroking (for equity-related risk management)
– Islamic structured products (for Sukuk-related risk management)
– Their purpose is to reduce exposure to market risks while avoiding prohibited elements.
• Products in the Islamic Capital Market
– The main products traded within the ICM include:
- Islamic Exchange-Traded Funds (ETFs) – diversified Shari’ah-compliant funds traded on exchanges.
- Shares and Quasi-Equity Instruments – ownership-based instruments in compliant companies.
- Sukuk (Islamic Bonds) – asset-backed or asset-based long-term financing instruments.
- Islamic Commercial Paper – short-term Shari’ah-compliant instruments for working capital needs.
• Role and Importance of the ICM
– The ICM functions as a component of the overall Islamic financial system.
– It operates parallel to the conventional capital market while remaining Shari’ah-compliant.
– It complements Islamic banking by expanding investment and financing options.
– The ICM supports ethical, risk-sharing, and asset-backed financing.
– It contributes to sustainable economic growth and global development of Islamic finance.
- Published on
KembaraXtra-Islamic Finance-Islamic Capital Market- Exchange-Traded Funds (Islamic ETFs)
• Islamic Exchange-Traded Funds (Islamic ETFs) are Shari’ah-compliant investment funds that are traded on stock exchanges, just like ordinary shares.
• An Islamic ETF pools money from many investors and invests it only in assets that comply with Shari’ah principles.
• The purpose of Islamic ETFs is to provide investors with diversified, ethical, and Shari’ah-compliant investment exposure.
Key Characteristics of Islamic ETFs
• Shari’ah Compliance
– Investments exclude companies involved in prohibited activities such as:
- interest-based financial services
- alcohol, gambling, pork, tobacco, and unethical entertainment
– Financial ratios (e.g. debt and interest income levels) are screened according to Shari’ah standards.
• Index-Tracking Nature
– Most Islamic ETFs track Islamic stock indexes, such as Islamic market indices.
– The ETF aims to replicate the performance of the selected Shari’ah-compliant index.
• Exchange-Traded
– Islamic ETFs are bought and sold on stock exchanges throughout the trading day.
– Prices fluctuate based on market demand and supply, similar to ordinary shares.
• Diversification
– By investing in a basket of Shari’ah-compliant securities, Islamic ETFs reduce company-specific risk.
• Transparency
– The underlying assets and index composition are publicly disclosed.
– Investors can clearly see where their money is invested.
• Liquidity
– Islamic ETFs offer easy entry and exit, as they can be traded during market hours.
Types of Islamic ETFs
• Equity-based Islamic ETFs – invest in Shari’ah-compliant stocks
• Sukuk-based Islamic ETFs – invest in Islamic bonds (Sukuk)
• Sector-specific Islamic ETFs – focus on specific halal sectors
• Geographic Islamic ETFs – focus on Shari’ah-compliant companies in certain regions
Simple Example
• An investor buys units of an Islamic ETF that tracks a Shari’ah-compliant equity index.
• The ETF holds shares of multiple halal companies.
• The investor benefits from:
- price appreciation
- dividends (if distributed)
• All returns are generated without violating Shari’ah principles.
One-Line Exam Answer
Islamic exchange-traded funds are Shari’ah-compliant investment funds traded on stock exchanges that track Islamic indexes or portfolios while adhering to Islamic ethical and financial principles.
