KembaraXtra–Islamic Finance–Islamic Capital Market – Flow of Funds in the Islamic Capital Market

KembaraXtra–Islamic Finance–Islamic Capital Market – Flow of Funds in the Islamic Capital Market

1. Financial Architecture in an Economy

There are two major types of financial systems:
- Bank-based system
  - Banks are the main source of external finance.
  - In Islamic finance, this role is played by Islamic Financial Institutions (IFIs).
- Market-based system
  - Firms raise funds directly from the public through capital markets.
  - Financing is done by issuing equity and Shari’ah-compliant debt instruments (e.g. Sukuk)
The Islamic capital market (ICM) follows a market-based system but strictly complies with Shari’ah principles.

2. Replacement of Interest with Profit Sharing

The Islamic capital market prohibits interest (riba).
Instead of fixed interest:
- Returns are generated through profit-sharing arrangements.
- Investors earn returns only if the underlying business performs well.

3. Savings Surplus Units (SSUs)

Savings Surplus Units (SSUs) are individuals or entities whose:
- Income > Expenditure

Characteristics of SSUs:
- They accumulate surplus wealth.
- They are obligated to pay Zakah if their wealth exceeds Nisab.

Why SSUs must invest:
- Idle wealth reduces due to Zakah.
- To avoid wealth erosion and earn halal returns, SSUs invest in:
  - Real economic activities
  - Shari’ah-compliant capital market instruments (shares, Sukuk, funds

4. Savings Deficit Units (SDUs)

Savings Deficit Units (SDUs) are consumers or firms whose:
- Expenditure > Income

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