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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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