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KembaraXtra-Islamic Finance-Islamic Capital Market-Classification of the Islamic Capital Market (ICM)
– The Islamic capital market is broadly divided into two main segments:
– Primary market
– Secondary market
• Primary Market in the Islamic Capital Market
– The Islamic primary market deals with new issues of Islamic equity and debt instruments.
– Securities are issued either as:
– entirely new flotations (e.g. IPOs), or
– offers to existing investors (e.g. rights issues).
– In all cases, the issuing organisation raises fresh capital in exchange for securities.
– For companies, securities issued may take the form of:
– shares (equity), or
– Islamic bonds (Sukuk).
– Governments typically issue sovereign Sukuk to raise funds.
– Having a public quotation (listing) on a stock exchange is a major advantage for firms, as it makes it easier to raise additional capital in the future.
• Secondary Market in the Islamic Capital Market
– The secondary market facilitates the trading of Islamic financial assets that were issued previously.
– These assets include shares and Sukuk.
– Trading takes place among investors, not with the issuing organisation.
– The secondary market provides liquidity, allowing investors to:
– sell securities easily
– convert investments into cash when needed
– Liquidity ensures that investments are not locked in for long periods.
– The Islamic secondary market enables the continuous reallocation of financial assets among investors.
– It also allows investors to diversify their portfolios by reallocating funds across different Islamic financial instruments.
• Key Products in the Islamic Capital Market
• Overall Insight
– The Islamic capital market integrates primary and secondary markets with a range of Shari’ah-compliant instruments.
– It supports capital formation, liquidity, risk-sharing, and ethical investment in line with Islamic principles.
– The Islamic capital market is broadly divided into two main segments:
– Primary market
– Secondary market
• Primary Market in the Islamic Capital Market
– The Islamic primary market deals with new issues of Islamic equity and debt instruments.
– Securities are issued either as:
– entirely new flotations (e.g. IPOs), or
– offers to existing investors (e.g. rights issues).
– In all cases, the issuing organisation raises fresh capital in exchange for securities.
– For companies, securities issued may take the form of:
– shares (equity), or
– Islamic bonds (Sukuk).
– Governments typically issue sovereign Sukuk to raise funds.
– Having a public quotation (listing) on a stock exchange is a major advantage for firms, as it makes it easier to raise additional capital in the future.
• Secondary Market in the Islamic Capital Market
– The secondary market facilitates the trading of Islamic financial assets that were issued previously.
– These assets include shares and Sukuk.
– Trading takes place among investors, not with the issuing organisation.
– The secondary market provides liquidity, allowing investors to:
– sell securities easily
– convert investments into cash when needed
– Liquidity ensures that investments are not locked in for long periods.
– The Islamic secondary market enables the continuous reallocation of financial assets among investors.
– It also allows investors to diversify their portfolios by reallocating funds across different Islamic financial instruments.
• Key Products in the Islamic Capital Market
- Ordinary Stocks
– Ordinary stocks (common shares) represent basic ownership in a company.
– Shareholders usually enjoy voting rights, typically one vote per share.
– Ownership is proportional to the number of shares held.
– Ordinary shareholders benefit from:
– dividends (if declared)
– capital appreciation
- Preferred Stocks
– Preferred stocks are a hybrid instrument, combining features of both equity and debt.
– They usually offer fixed dividends, unlike ordinary shares.
– Preferred shareholders generally do not have voting rights.
– They have priority over ordinary shareholders in dividend payments but rank below debt holders.
- Mutual Funds
– Mutual funds pool money from many small investors.
– Funds are invested in:
– stocks
– bonds
– money market instruments
– other Shari’ah-compliant assets
– Professional fund managers manage the investments.
– The aim is to generate income and capital growth for investors.
- Single Stock Futures
– Single stock futures are contracts between two parties.
– The buyer agrees to purchase a specified number of shares of a single stock at a future date and agreed price.
– The seller agrees to deliver the shares at that future date.
– These contracts are used for hedging or price speculation, subject to Shari’ah considerations.
- Mudarabah Sukuk
– Mudarabah Sukuk represent ownership in assets or ventures managed under a Mudarabah contract.
– The contract is between:
– capital providers (investors), and
– entrepreneurs (managers).
– Profits are shared based on a pre-agreed ratio.
– If losses occur:
– capital providers bear the financial loss
– entrepreneurs lose only their effort and do not receive profits
- Ijara Sukuk
– Ijara Sukuk are based on a leasing (rental) contract.
– Investors own the underlying asset and lease it to a user.
– Sukuk holders earn returns through rental income.
– The contract grants the right to use an asset in exchange for payment.
- Musharaka Sukuk
– Musharaka Sukuk represent ownership in tangible assets or joint ventures.
– Holders share in both:
– profits, and
– losses, in proportion to their ownership.
– Any changes in the asset’s value before maturity affect the Sukuk holders.
– These Sukuk are issued by:
– private companies
– corporations
– governments
• Overall Insight
– The Islamic capital market integrates primary and secondary markets with a range of Shari’ah-compliant instruments.
– It supports capital formation, liquidity, risk-sharing, and ethical investment in line with Islamic principles.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Istisna (Manufacturing an Asset)
• Istisna is a Shari’ah-compliant long-term financial contract used in Islamic finance for manufacturing, building, or constructing assets.
• Under an Istisna agreement, one party undertakes the obligation to manufacture, build, or construct an asset according to agreed specifications.
• The manufacturer or producer is required to ensure the completion and delivery of the asset to the customer.
• Istisna differs from Salam because it does not require full advance payment at the time of contract execution.
• The flexible nature of Istisna allows customers to choose different payment structures.
• Payments under an Istisna contract may be made in instalments during the project, at the time of delivery, or after the completed asset has been delivered.
• This flexibility makes Istisna suitable for projects with long construction or manufacturing periods.
• Istisna is most commonly used in infrastructure-related projects.
• Typical applications include power plants, factories, roads, schools, hospitals, commercial buildings, and residential developments.
• An Istisna contract generally involves three major parties.
• The producer or manufacturer is responsible for constructing or manufacturing the asset.
• The bank acts as the financier, facilitating the funding of the project.
• The customer acts as the purchaser of the completed asset.
• The Istisna structure ensures that financing is linked to real asset creation rather than monetary transactions, in compliance with Shari’ah principles.
• Istisna is a Shari’ah-compliant long-term financial contract used in Islamic finance for manufacturing, building, or constructing assets.
• Under an Istisna agreement, one party undertakes the obligation to manufacture, build, or construct an asset according to agreed specifications.
• The manufacturer or producer is required to ensure the completion and delivery of the asset to the customer.
• Istisna differs from Salam because it does not require full advance payment at the time of contract execution.
• The flexible nature of Istisna allows customers to choose different payment structures.
• Payments under an Istisna contract may be made in instalments during the project, at the time of delivery, or after the completed asset has been delivered.
• This flexibility makes Istisna suitable for projects with long construction or manufacturing periods.
• Istisna is most commonly used in infrastructure-related projects.
• Typical applications include power plants, factories, roads, schools, hospitals, commercial buildings, and residential developments.
• An Istisna contract generally involves three major parties.
• The producer or manufacturer is responsible for constructing or manufacturing the asset.
• The bank acts as the financier, facilitating the funding of the project.
• The customer acts as the purchaser of the completed asset.
• The Istisna structure ensures that financing is linked to real asset creation rather than monetary transactions, in compliance with Shari’ah principles.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Salam (Advance Payment Sale)
• Salam is a Shari’ah-compliant financial contract that requires the full payment for a commodity to be made in advance in exchange for delivery at a specified future date.
• Under a Salam agreement, payment is immediate, while delivery of the commodity is deferred.
• Salam is applied when the commodity involved is expected to experience a price increase in the future.
• This contract benefits the buyer, as it allows the purchase of goods or services at a price lower than the anticipated future market rate.
• Because delivery occurs in the future, it is mandatory that the commodity’s features, quantity, quality, and specifications are defined with complete clarity.
• Clear and detailed description of the commodity forms the basis upon which the Salam contract is concluded.
• This requirement ensures avoidance of ambiguity and uncertainty (Gharar).
• Under Salam financing, the Islamic Financial Institution makes full advance payment to the seller or exporter.
• The seller or exporter then undertakes the responsibility to produce and/or deliver the goods on the agreed future date.
• In some Salam-based arrangements, the financier may act both as a buyer and a seller.
• This specific structure is known as parallel Salam.
• In a parallel Salam, the IFI first purchases the Salam asset from the seller by making full advance payment and fixing a future delivery date.
• The IFI then enters into another Salam contract as a seller with a third party for a shorter delivery period.
• The first and second Salam contracts must remain independent and separate to ensure Shari’ah compliance.
• The profit earned by the IFI arises from the price difference, or spread, between the two Salam contracts.
• Parallel Salam is particularly useful for financing producers, as the IFI itself is neither the ultimate producer nor the end user of the goods.
• Salam contracts are characterised by specific governing principles.
• A forward purchase of a commodity is made under the contract.
• Full payment is made in advance at the beginning of the contract period.
• Goods received at the end of the contract period must strictly conform to the specifications agreed upon at contract initiation.
• If the contract cannot be completed according to the agreed specifications, appropriate remedies must be made available.
• Salam enables financing of productive economic activity while maintaining strict compliance with Shari’ah principles.
• Salam is a Shari’ah-compliant financial contract that requires the full payment for a commodity to be made in advance in exchange for delivery at a specified future date.
• Under a Salam agreement, payment is immediate, while delivery of the commodity is deferred.
• Salam is applied when the commodity involved is expected to experience a price increase in the future.
• This contract benefits the buyer, as it allows the purchase of goods or services at a price lower than the anticipated future market rate.
• Because delivery occurs in the future, it is mandatory that the commodity’s features, quantity, quality, and specifications are defined with complete clarity.
• Clear and detailed description of the commodity forms the basis upon which the Salam contract is concluded.
• This requirement ensures avoidance of ambiguity and uncertainty (Gharar).
• Under Salam financing, the Islamic Financial Institution makes full advance payment to the seller or exporter.
• The seller or exporter then undertakes the responsibility to produce and/or deliver the goods on the agreed future date.
• In some Salam-based arrangements, the financier may act both as a buyer and a seller.
• This specific structure is known as parallel Salam.
• In a parallel Salam, the IFI first purchases the Salam asset from the seller by making full advance payment and fixing a future delivery date.
• The IFI then enters into another Salam contract as a seller with a third party for a shorter delivery period.
• The first and second Salam contracts must remain independent and separate to ensure Shari’ah compliance.
• The profit earned by the IFI arises from the price difference, or spread, between the two Salam contracts.
• Parallel Salam is particularly useful for financing producers, as the IFI itself is neither the ultimate producer nor the end user of the goods.
• Salam contracts are characterised by specific governing principles.
• A forward purchase of a commodity is made under the contract.
• Full payment is made in advance at the beginning of the contract period.
• Goods received at the end of the contract period must strictly conform to the specifications agreed upon at contract initiation.
• If the contract cannot be completed according to the agreed specifications, appropriate remedies must be made available.
• Salam enables financing of productive economic activity while maintaining strict compliance with Shari’ah principles.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Wadiah (Safekeeping)
• Wadiah is synonymous with the concepts of trust, custody, deposit, and safekeeping in Islamic finance.
• A Wadiah contract is a Shari’ah-compliant arrangement in which a depositor places funds or assets with an Islamic bank solely for the purpose of safekeeping.
• Under this contract, the relationship between the depositor and the bank is based on trust rather than profit generation.
• The bank is responsible for ensuring the safe custody of the depositor’s funds or assets.
• Wadiah contracts are often characterised by the charging of a fee by the bank for providing safekeeping services.
• Wadiah generally exists in two main forms.
• Wadiah yad Amanah refers to deposits made purely on the basis of trust, where the bank guarantees safe custody but does not guarantee the value if loss occurs without negligence.
• Wadiah yad Dhamanah refers to deposits made with a guarantee of safekeeping, where the bank guarantees the return of the deposited amount.
• Wadiah originates from the traditional concept of Amanah, where one person entrusts assets to another solely for protection and security.
• As a financial practice, Wadiah has been widely implemented in Islamic banking systems in countries such as Malaysia and Bangladesh.
• Islamic banks charge an account maintenance fee for Wadiah accounts to cover administrative and operational costs associated with managing funds or assets in safe custody.
• Wadiah bank accounts do not involve profit-and-loss sharing mechanisms.
• These accounts do not generate profit for the depositor.
• The bank guarantees the full return of the deposited amount upon demand or at maturity at its own risk.
• No financial risk is shared by the depositor under a Wadiah arrangement.
• With the approval of the depositor, the bank may utilise or invest the deposited funds.
• Any profit earned from such use of funds belongs to the bank.
• The bank may choose to share part of the profit with depositors if approved by senior management, but such sharing is voluntary and not contractually guaranteed.
• A maintenance fee is applicable for Wadiah accounts to sustain account administration and safekeeping services.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Wakalah (Agency)
• Wakalah is a Shari’ah-compliant agency contract established between a principal and an agent.
• Under a Wakalah contract, the principal authorises the agent to act on their behalf in carrying out specific tasks or services.
• The agent performs the assigned duties in exchange for a payment or fee known as Ujrah.
• Wakalah is commonly used to facilitate financial and commercial transactions without transferring ownership or risk to the agent.
• In trade finance, an importer applying for a letter of credit under Wakalah authorises the bank to act on their behalf.
• The bank, acting as an agent, issues the letter of credit to the exporter’s bank on behalf of the importer.
• The issuing bank performs administrative and transactional services related to the letter of credit.
• For providing these services, the bank charges a Wakalah fee (Ujrah) to the importer.
• The bank does not bear commercial risk in the transaction unless negligence or misconduct occurs.
• Wakalah contracts are service-based and do not involve profit-and-loss sharing.
• Wakalah is governed by specific Shari’ah principles.
• The contract must clearly establish an agency relationship between the principal and the agent.
• Wakalah facilitates transactions by allowing the principal to delegate authority.
• The agent is entitled only to the agreed fee (Ujrah) and not to business profits.
Examples of Wakalah
• Letter of Credit (Trade Finance): An importer appoints an Islamic bank as an agent under Wakalah to issue a letter of credit to the exporter’s bank in exchange for a fee.
• Investment Wakalah: An investor appoints an Islamic bank as an agent to invest funds in Shari’ah-compliant assets for a fixed agency fee.
• Takaful Operations: A Takaful operator acts as an agent under Wakalah to manage participants’ funds and earns a Wakalah fee for providing administrative and management services.
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KembaraXtra-Islamic Finance–Islamic Capital Market – Overview
• Islamic banking is a banking system that operates entirely in accordance with the principles of Shari’ah.
• An examination of the historical evolution of Islamic banking from its inception demonstrates why it is recognised as a distinct and respected financial structure within the international financial system.
• The consistent growth of Islamic finance can be attributed to the revival and development of Islamic economic thought.
• Rising customer demand for Shari’ah-compliant financial products and services has further reinforced the growth of Islamic finance.
• The benefits offered by the Islamic financial industry have attracted both Muslim and non-Muslim participants into the global financial market.
• Shari’ah-compliant financial products are estimated to be worth approximately US$3 trillion globally.
• According to the London-based International Financial Services (McKenzie, 2010), Shari’ah-compliant assets increased by 40% from US$549 billion in 2006 to US$758 billion in 2007.
• These assets experienced a further growth of 25% by the end of 2008, reaching approximately US$951 billion.
• Islamic Financial Institutions (IFIs) have been growing at an annual rate of 15%–20%, which significantly exceeds the growth rate of the conventional financial industry.
• Over the years, Islamic finance has continued to evolve and gain strong momentum on a global scale.
• Financial institutions worldwide, including conventional banks, have introduced Islamic financial products through Islamic windows to meet the increasing demand for Shari’ah-based offerings.
• To remain competitive in the global financial system, the Islamic financial industry must adopt practices that enhance transparency and credibility in international markets.
• Greater acceptance of diverse interpretations of Shari’ah principles across regions and institutions may be required.
• Regulatory oversight within the Islamic financial industry should be strengthened to ensure consistency and market confidence.
• These measures collectively can enhance the appeal and reinforce the credibility of Islamic finance as a viable alternative to mainstream financial systems in the long term.
• Since every financial transaction in Islamic finance must be based on a valid trading agreement, Shari’ah-compliant financial products may appear more complex than conventional financial instruments.
• Sustainable Shari’ah-compliant alternatives to mainstream instruments such as corporate treasury products and derivatives remain limited.
• Innovation remains a key challenge for the Islamic financial industry.
• One major constraint to innovation is the limited number of qualified Shari’ah board members available to assess and approve financial products for Shari’ah compliance.
• Islamic banking is a banking system that operates entirely in accordance with the principles of Shari’ah.
• An examination of the historical evolution of Islamic banking from its inception demonstrates why it is recognised as a distinct and respected financial structure within the international financial system.
• The consistent growth of Islamic finance can be attributed to the revival and development of Islamic economic thought.
• Rising customer demand for Shari’ah-compliant financial products and services has further reinforced the growth of Islamic finance.
• The benefits offered by the Islamic financial industry have attracted both Muslim and non-Muslim participants into the global financial market.
• Shari’ah-compliant financial products are estimated to be worth approximately US$3 trillion globally.
• According to the London-based International Financial Services (McKenzie, 2010), Shari’ah-compliant assets increased by 40% from US$549 billion in 2006 to US$758 billion in 2007.
• These assets experienced a further growth of 25% by the end of 2008, reaching approximately US$951 billion.
• Islamic Financial Institutions (IFIs) have been growing at an annual rate of 15%–20%, which significantly exceeds the growth rate of the conventional financial industry.
• Over the years, Islamic finance has continued to evolve and gain strong momentum on a global scale.
• Financial institutions worldwide, including conventional banks, have introduced Islamic financial products through Islamic windows to meet the increasing demand for Shari’ah-based offerings.
• To remain competitive in the global financial system, the Islamic financial industry must adopt practices that enhance transparency and credibility in international markets.
• Greater acceptance of diverse interpretations of Shari’ah principles across regions and institutions may be required.
• Regulatory oversight within the Islamic financial industry should be strengthened to ensure consistency and market confidence.
• These measures collectively can enhance the appeal and reinforce the credibility of Islamic finance as a viable alternative to mainstream financial systems in the long term.
• Since every financial transaction in Islamic finance must be based on a valid trading agreement, Shari’ah-compliant financial products may appear more complex than conventional financial instruments.
• Sustainable Shari’ah-compliant alternatives to mainstream instruments such as corporate treasury products and derivatives remain limited.
• Innovation remains a key challenge for the Islamic financial industry.
• One major constraint to innovation is the limited number of qualified Shari’ah board members available to assess and approve financial products for Shari’ah compliance.
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KembaraXtra-Islamic Finance- Islamic Capital Market-Major Contracts Used in Islamic Finance
1. Mudarabah (Trust Financing)
• A trust-based partnership contract between a capital provider (Rabb al-Mal) and an entrepreneur/manager (Mudarib).
• Depositors place funds with the bank as investments rather than loans.
• The bank uses deposited funds for trading and financing activities.
• Profits are shared between parties based on a pre-agreed ratio.
• Losses are borne financially by the capital provider, while the Mudarib loses time and effort.
• Widely used in investment accounts, mutual funds, Sukuk structures, and business financing.
2. Musharakah (Profit and Loss Sharing Joint Venture)
• A partnership contract where all parties contribute capital to a joint venture.
• Profits are shared according to an agreed ratio.
• Losses are shared strictly in proportion to capital contribution.
• Encourages joint ownership, shared risk, and shared management.
• Commonly used in project finance and joint ventures.
3. Diminishing Musharakah
• A form of Musharakah commonly used in property and home financing.
• The bank and customer jointly purchase an asset.
• The customer gradually purchases the bank’s share over time.
• The bank’s ownership decreases while the customer’s ownership increases.
• Often combined with rental payments during the shared ownership period.
4. Permanent Musharakah
• A long-term partnership arrangement with no fixed termination date.
• Continues until partners mutually agree to dissolve the venture.
• Profits are shared as agreed; losses are shared based on capital contribution.
• Commonly used in industrial projects and long-term business ventures.
5. Murabahah (Cost Plus Financing)
• A sale-based financing contract, not a loan.
• The bank purchases an asset from a supplier upon the customer’s request.
• The bank sells the asset to the customer at cost plus an agreed mark-up.
• The mark-up is fixed and disclosed upfront.
• Payment is usually deferred over a fixed credit period.
• Widely used for asset financing, trade finance, and consumer goods.
6. Ijarah (Leasing)
• A leasing contract where the bank acts as lessor and the customer as lessee.
• The bank purchases and owns the asset.
• The asset is leased to the customer in exchange for rental payments.
• Ownership remains with the bank during the lease period.
• Ownership is transferred only if the asset is later purchased through a separate sale agreement.
• Commonly used for equipment, vehicles, real estate, and infrastructure financing.
7. Istisna (Manufacturing an Asset)
• A long-term contract for manufacturing, construction, or building assets.
• The manufacturer or contractor undertakes to deliver the asset as per agreed specifications.
• Payment can be made in instalments, at delivery, or after completion.
• Suitable for large-scale and infrastructure projects.
• Common applications include power plants, factories, roads, schools, hospitals, and housing projects.
• Involves three parties: manufacturer, bank (financier), and customer.
8. Salam (Advance Payment Sale)
• A forward sale contract where full payment is made in advance.
• Delivery of goods is deferred to a future date.
• Used when the commodity is expected to increase in price.
• Requires detailed specification of quantity, quality, and delivery date to avoid Gharar.
• The bank pays the seller or producer upfront and receives goods later.
• Commonly used in agriculture and commodity financing.
9. Parallel Salam
• A structure involving two separate Salam contracts.
• The bank first buys goods under Salam from a producer.
• The bank then sells the goods under another Salam contract to a third party.
• The two contracts must remain independent.
• The bank earns profit from the price difference between the two contracts.
• Useful for financing producers where the bank is neither producer nor end user.
10. Wadiah (Safekeeping)
• A custodial contract based on trust and safekeeping.
• Depositors place funds or assets with the bank for safekeeping.
• The bank may charge a maintenance or custody fee.
• No profit-and-loss sharing is involved.
11. Wadiah Yad Amanah
• Deposits are made purely on the basis of trust.
• The bank is responsible for safekeeping but does not guarantee value unless negligent.
• Commonly used for asset safekeeping.
12. Wadiah Yad Dhamanah
• Deposits are guaranteed by the bank.
• The bank guarantees full repayment of deposited funds.
• Any return to depositors is voluntary and not guaranteed.
• Commonly used for savings and current accounts.
13. Wakalah (Agency)
• An agency contract between a principal and an agent.
• The principal authorises the agent to act on their behalf.
• The agent is paid a fixed fee (Ujrah) for services rendered.
• The agent does not share in profits or losses.
• Commonly used for letters of credit, investment agency, fund management, and Takaful operations.
1. Mudarabah (Trust Financing)
• A trust-based partnership contract between a capital provider (Rabb al-Mal) and an entrepreneur/manager (Mudarib).
• Depositors place funds with the bank as investments rather than loans.
• The bank uses deposited funds for trading and financing activities.
• Profits are shared between parties based on a pre-agreed ratio.
• Losses are borne financially by the capital provider, while the Mudarib loses time and effort.
• Widely used in investment accounts, mutual funds, Sukuk structures, and business financing.
2. Musharakah (Profit and Loss Sharing Joint Venture)
• A partnership contract where all parties contribute capital to a joint venture.
• Profits are shared according to an agreed ratio.
• Losses are shared strictly in proportion to capital contribution.
• Encourages joint ownership, shared risk, and shared management.
• Commonly used in project finance and joint ventures.
3. Diminishing Musharakah
• A form of Musharakah commonly used in property and home financing.
• The bank and customer jointly purchase an asset.
• The customer gradually purchases the bank’s share over time.
• The bank’s ownership decreases while the customer’s ownership increases.
• Often combined with rental payments during the shared ownership period.
4. Permanent Musharakah
• A long-term partnership arrangement with no fixed termination date.
• Continues until partners mutually agree to dissolve the venture.
• Profits are shared as agreed; losses are shared based on capital contribution.
• Commonly used in industrial projects and long-term business ventures.
5. Murabahah (Cost Plus Financing)
• A sale-based financing contract, not a loan.
• The bank purchases an asset from a supplier upon the customer’s request.
• The bank sells the asset to the customer at cost plus an agreed mark-up.
• The mark-up is fixed and disclosed upfront.
• Payment is usually deferred over a fixed credit period.
• Widely used for asset financing, trade finance, and consumer goods.
6. Ijarah (Leasing)
• A leasing contract where the bank acts as lessor and the customer as lessee.
• The bank purchases and owns the asset.
• The asset is leased to the customer in exchange for rental payments.
• Ownership remains with the bank during the lease period.
• Ownership is transferred only if the asset is later purchased through a separate sale agreement.
• Commonly used for equipment, vehicles, real estate, and infrastructure financing.
7. Istisna (Manufacturing an Asset)
• A long-term contract for manufacturing, construction, or building assets.
• The manufacturer or contractor undertakes to deliver the asset as per agreed specifications.
• Payment can be made in instalments, at delivery, or after completion.
• Suitable for large-scale and infrastructure projects.
• Common applications include power plants, factories, roads, schools, hospitals, and housing projects.
• Involves three parties: manufacturer, bank (financier), and customer.
8. Salam (Advance Payment Sale)
• A forward sale contract where full payment is made in advance.
• Delivery of goods is deferred to a future date.
• Used when the commodity is expected to increase in price.
• Requires detailed specification of quantity, quality, and delivery date to avoid Gharar.
• The bank pays the seller or producer upfront and receives goods later.
• Commonly used in agriculture and commodity financing.
9. Parallel Salam
• A structure involving two separate Salam contracts.
• The bank first buys goods under Salam from a producer.
• The bank then sells the goods under another Salam contract to a third party.
• The two contracts must remain independent.
• The bank earns profit from the price difference between the two contracts.
• Useful for financing producers where the bank is neither producer nor end user.
10. Wadiah (Safekeeping)
• A custodial contract based on trust and safekeeping.
• Depositors place funds or assets with the bank for safekeeping.
• The bank may charge a maintenance or custody fee.
• No profit-and-loss sharing is involved.
11. Wadiah Yad Amanah
• Deposits are made purely on the basis of trust.
• The bank is responsible for safekeeping but does not guarantee value unless negligent.
• Commonly used for asset safekeeping.
12. Wadiah Yad Dhamanah
• Deposits are guaranteed by the bank.
• The bank guarantees full repayment of deposited funds.
• Any return to depositors is voluntary and not guaranteed.
• Commonly used for savings and current accounts.
13. Wakalah (Agency)
• An agency contract between a principal and an agent.
• The principal authorises the agent to act on their behalf.
• The agent is paid a fixed fee (Ujrah) for services rendered.
• The agent does not share in profits or losses.
• Commonly used for letters of credit, investment agency, fund management, and Takaful operations.
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KembaraXtra–Islamic Finance–Islamic Capital Market – Introduction (Primary and Secondary Markets)
• Financial markets are generally characterised by the existence of primary markets.
• Financial markets do not always necessarily include secondary markets.
• In the context of savings deposits, a primary market always exists.
• However, savings deposits cannot be sold or transferred by deposit holders.
• Financial instruments that are marketable give rise to the existence of secondary markets.
• Securities that can be bought and sold after issuance contribute to secondary market formation.
• Listed equities are marketable financial instruments.
• As a result, equity markets consist of both primary and secondary markets.
• Newly formed equities are issued in the primary equity market.
• The primary market facilitates the initial issuance of securities to investors.
• Secondary markets act as platforms for trading existing securities after initial issuance.
• Securities traded in secondary markets do not provide direct funding to issuing companies.
• Issuing companies receive funds only at the primary market stage.
• The amount of funding received by issuing companies depends on the number of shares issued and their issue price.
• Primary and secondary markets together ensure capital formation and liquidity in financial markets.
• The operational mechanisms of both primary and secondary markets are explained in the subsequent section.
• Financial markets are generally characterised by the existence of primary markets.
• Financial markets do not always necessarily include secondary markets.
• In the context of savings deposits, a primary market always exists.
• However, savings deposits cannot be sold or transferred by deposit holders.
• Financial instruments that are marketable give rise to the existence of secondary markets.
• Securities that can be bought and sold after issuance contribute to secondary market formation.
• Listed equities are marketable financial instruments.
• As a result, equity markets consist of both primary and secondary markets.
• Newly formed equities are issued in the primary equity market.
• The primary market facilitates the initial issuance of securities to investors.
• Secondary markets act as platforms for trading existing securities after initial issuance.
• Securities traded in secondary markets do not provide direct funding to issuing companies.
• Issuing companies receive funds only at the primary market stage.
• The amount of funding received by issuing companies depends on the number of shares issued and their issue price.
• Primary and secondary markets together ensure capital formation and liquidity in financial markets.
• The operational mechanisms of both primary and secondary markets are explained in the subsequent section.
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kembaraXtra-Islamic Finance-Islamic Capital Market-Primary Market
• The primary market does not have a physical market structure like Wall Street.
• It functions within the financial market system where individuals and institutions issue securities.
• The primary market is responsible for the initial issuance and public trading of stocks and bonds.
• Unlike the secondary market, it does not involve the buying and selling of securities between investors.
• In the primary market, investors purchase securities directly from issuing entities.
• Banks play a crucial role by underwriting new security issues.
• One of the key functions of the primary market is the Initial Public Offering (IPO).
• An IPO is the process through which a private company becomes a publicly traded company.
• Through an IPO, companies offer equity shares to investors for the first time.
• IPOs enhance a company’s fundraising capacity and support business growth.
• IPOs also provide investors with the first opportunity to invest in the company.
• Another fundraising method in the primary market is the Further Public Offer (FPO).
• An FPO allows existing listed companies to issue fresh equity shares.
• FPOs help listed companies raise additional capital from the public.
Primary Market for Unlisted Companies
• Unlisted shares operate directly within the primary market framework.
• Owners of new companies may appoint accountants or lawyers to create shares.
• Funds raised from share issuance are deposited into the company’s bank account.
• If further funding is required, the company prepares a prospectus.
• The prospectus is used to approach potential investors.
• If investors accept the offer, shares are allocated to them.
• The funds raised are credited to the company’s bank account.
Primary Market for Listed Companies
• For listed companies, the primary market structure is relatively hassle-free.
• Listed companies can raise additional funds more efficiently due to established market access.
Key Features of the Primary Market
• The economic role of the primary market in capital formation.
• Advantages gained through listing on the market.
• Conditions that must be fulfilled for listing.
• Categories of companies eligible to list.
• Listed products other than shares, such as bonds and other securities.
• Processes involved in listing securities.
• The role and importance of the prospectus.
• Share underwriting issues and guarantees.
• Additional financial resources generated through primary market equity issues.
• The ultimate objective of the primary market is raising capital for companies.
• The primary market does not have a physical market structure like Wall Street.
• It functions within the financial market system where individuals and institutions issue securities.
• The primary market is responsible for the initial issuance and public trading of stocks and bonds.
• Unlike the secondary market, it does not involve the buying and selling of securities between investors.
• In the primary market, investors purchase securities directly from issuing entities.
• Banks play a crucial role by underwriting new security issues.
• One of the key functions of the primary market is the Initial Public Offering (IPO).
• An IPO is the process through which a private company becomes a publicly traded company.
• Through an IPO, companies offer equity shares to investors for the first time.
• IPOs enhance a company’s fundraising capacity and support business growth.
• IPOs also provide investors with the first opportunity to invest in the company.
• Another fundraising method in the primary market is the Further Public Offer (FPO).
• An FPO allows existing listed companies to issue fresh equity shares.
• FPOs help listed companies raise additional capital from the public.
Primary Market for Unlisted Companies
• Unlisted shares operate directly within the primary market framework.
• Owners of new companies may appoint accountants or lawyers to create shares.
• Funds raised from share issuance are deposited into the company’s bank account.
• If further funding is required, the company prepares a prospectus.
• The prospectus is used to approach potential investors.
• If investors accept the offer, shares are allocated to them.
• The funds raised are credited to the company’s bank account.
Primary Market for Listed Companies
• For listed companies, the primary market structure is relatively hassle-free.
• Listed companies can raise additional funds more efficiently due to established market access.
Key Features of the Primary Market
• The economic role of the primary market in capital formation.
• Advantages gained through listing on the market.
• Conditions that must be fulfilled for listing.
• Categories of companies eligible to list.
• Listed products other than shares, such as bonds and other securities.
• Processes involved in listing securities.
• The role and importance of the prospectus.
• Share underwriting issues and guarantees.
• Additional financial resources generated through primary market equity issues.
• The ultimate objective of the primary market is raising capital for companies.
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Kembaraxtra-Islamic Finance-Islamic Capital Market-Definition of Underwriting
Underwriting new securities is the process in which a financial institution (usually an investment bank) agrees to take responsibility for selling newly issued securities (such as shares or bonds) to investors on behalf of a company.
What underwriting means
How underwriting works
Why underwriting is important
Example
In Islamic finance
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Underwriting new securities is the process in which a financial institution (usually an investment bank) agrees to take responsibility for selling newly issued securities (such as shares or bonds) to investors on behalf of a company.
What underwriting means
- When a company wants to raise money by issuing new securities in the primary market, it appoints an underwriter (bank).
- The underwriter guarantees that the company will receive the required funds, even if all the securities are not sold to the public.
How underwriting works
- The underwriter evaluates the company’s financial position and market conditions.
- It helps decide the issue price of the securities.
- The underwriter markets the securities to investors.
- If investors do not buy all the securities, the underwriter buys the unsold portion itself.
Why underwriting is important
- It reduces risk for the issuing company, as funding is assured.
- It increases investor confidence, since the issue is backed by a reputable bank.
- It ensures a successful IPO or public issue.
Example
- A company issues shares worth $100 million.
- An investment bank underwrites the issue.
- If the public buys only $80 million worth of shares, the underwriter purchases the remaining $20 million, ensuring the company still receives the full $100 million.
In Islamic finance
- Underwriting must be Shari’ah-compliant.
- The bank may earn a fee for underwriting services.
- The process must avoid interest (riba) and excessive uncertainty (gharar).
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