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KembaraXtra–Islamic Finance–Islamic Capital Market – Liquidity Issues in the Islamic Capital Market
-Liquidity meaning:Ability to convert Islamic investments into cash quickly without significant loss in value
-Why liquidity matters:Investors need confidence to meet current and future financial obligations
-Unique liquidity challenge in ICM:Islamic investors face liquidity constraints not commonly faced in conventional markets due to the developing nature of the Islamic capital market
-Slower growth of Islamic products:Fewer Islamic financial instruments exist compared to conventional markets, limiting the availability of highly liquid assets
-Cause 1:Smaller market share:Islamic investments form a relatively small portion of global capital markets, leading to fewer participants, lower trading volume, and reduced liquidity, making resale of Islamic stocks or Sukuk slower
-Cause 2:Shari’ah compliance requirements:Mandatory business activity and financial ratio screening, along with differing scholarly opinions, slows product approval, listing, and development, affecting market liquidity
-Cause 3:Limited market access and infrastructure:Islamic capital market infrastructure is unevenly developed globally, restricting cross-border access and reducing investors’ ability to convert assets into cash quickly;for example, UK investors may struggle to access US-based Islamic assets
-Overall impact on investors:Higher liquidity risk,longer investment holding periods,and possible price discounts when selling assets
-Key takeaway:Liquidity remains a major structural challenge in the Islamic capital market,and strengthening market depth,access,and infrastructure is essential for long-term growth
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