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KembaraXtra -Islamic Finance-Islamic Capital Market – Exchanges
• An exchange market is a market structure where trading is executed through automated systems rather than manual negotiation.
→ This means computers handle buy and sell orders instead of people.
→ Example: Online stock trading platforms that match orders instantly.
• Trades are executed using an order book mechanism.
→ All buy (bid) and sell (ask) orders are recorded in a central system.
→ The system matches orders based on price and quantity.
→ Example: A buy order at $10 is matched with a sell order at $10.
• Trading occurs only when buyer and seller prices match.
→ If buyers and sellers cannot agree on price, no transaction takes place.
→ This ensures fairness and prevents forced trades.
→ Example: A buyer willing to pay $9 cannot trade if sellers ask $10.
• Exchange trading is mostly automated and electronic.
→ Human involvement is minimal compared to broker or dealer markets.
→ This improves speed and accuracy.
→ Example: Trades executed in milliseconds during market hours.
• There is no direct involvement of brokers or dealer intermediaries in matching trades.
→ Investors interact directly with the exchange system.
→ The exchange itself provides the matching platform.
→ Example: Retail investors placing orders directly through an exchange interface.
• Exchanges provide a centralised marketplace.
→ Buyers and sellers know exactly where to trade.
→ This reduces search costs for counterparties.
→ Example: All investors trade stocks through a single stock exchange platform.
• Automated exchanges are convenient and efficient.
→ Trades are fast, transparent, and low-cost.
→ This encourages higher trading volumes.
→ Example: Same-day buying and selling of shares.
• Exchange markets are mainly used for standardised securities.
→ Standardisation allows automation and quick matching.
→ Example securities include:
– Stocks
– Bonds
– Futures
– Options
– Other standardised contracts
• Securities traded on exchanges have defined contract or lot sizes.
→ Investors must trade in fixed quantities.
→ This ensures uniformity in trading.
→ Example: An exchange may require stock purchases in lots of 100 shares.
• Exchange trades usually have immediate execution time.
→ Once prices match, trades are completed instantly.
→ This contributes to high market liquidity.
→ Example: Shares bought and sold instantly during trading hours.
• Each exchange defines a tick size.
→ Tick size is the smallest allowed price movement.
→ This prevents random or meaningless price changes.
→ Example: In US stock exchanges, the tick size is $0.01.
• Exchanges also define a contract tick size.
→ Contract tick size = tick size × contract (lot) size.
→ This determines the smallest value change of a contract.
→ Example: $0.01 × 100 shares = $1 minimum contract price movement.
• Delivery terms apply mainly to commodity and derivative exchanges.
→ They specify how and when the asset must be delivered.
→ This avoids disputes between buyers and sellers.
→ Example: Gold contracts specifying delivery location and date.
• Quality standards are set for assets traded on exchanges.
→ Assets must meet predefined specifications.
→ This is crucial for physical commodities.
→ Example: Gold purity or diamond grading requirements.
• Physical assets must be in a deliverable and transferable form.
→ This ensures smooth settlement of contracts.
→ Assets must be ready for ownership transfer.
→ Example: Certified gold bars instead of raw gold.
• The standardisation of contracts ensures transparency and consistency.
→ All investors trade under the same rules.
→ This builds trust in the market.
→ Example: Identical futures contracts traded by all participants.
• Exchange markets are considered the most liquid market structure.
→ High trading volume and fast execution allow easy entry and exit.
→ Investors can buy or sell without major price changes.
→ Example: Highly traded stocks with continuous buying and selling.
One-Line Exam Answer
Exchange markets are automated, centralised platforms where standardised securities are traded through order book matching, ensuring transparency, efficiency, and high liquidity.
• An exchange market is a market structure where trading is executed through automated systems rather than manual negotiation.
→ This means computers handle buy and sell orders instead of people.
→ Example: Online stock trading platforms that match orders instantly.
• Trades are executed using an order book mechanism.
→ All buy (bid) and sell (ask) orders are recorded in a central system.
→ The system matches orders based on price and quantity.
→ Example: A buy order at $10 is matched with a sell order at $10.
• Trading occurs only when buyer and seller prices match.
→ If buyers and sellers cannot agree on price, no transaction takes place.
→ This ensures fairness and prevents forced trades.
→ Example: A buyer willing to pay $9 cannot trade if sellers ask $10.
• Exchange trading is mostly automated and electronic.
→ Human involvement is minimal compared to broker or dealer markets.
→ This improves speed and accuracy.
→ Example: Trades executed in milliseconds during market hours.
• There is no direct involvement of brokers or dealer intermediaries in matching trades.
→ Investors interact directly with the exchange system.
→ The exchange itself provides the matching platform.
→ Example: Retail investors placing orders directly through an exchange interface.
• Exchanges provide a centralised marketplace.
→ Buyers and sellers know exactly where to trade.
→ This reduces search costs for counterparties.
→ Example: All investors trade stocks through a single stock exchange platform.
• Automated exchanges are convenient and efficient.
→ Trades are fast, transparent, and low-cost.
→ This encourages higher trading volumes.
→ Example: Same-day buying and selling of shares.
• Exchange markets are mainly used for standardised securities.
→ Standardisation allows automation and quick matching.
→ Example securities include:
– Stocks
– Bonds
– Futures
– Options
– Other standardised contracts
• Securities traded on exchanges have defined contract or lot sizes.
→ Investors must trade in fixed quantities.
→ This ensures uniformity in trading.
→ Example: An exchange may require stock purchases in lots of 100 shares.
• Exchange trades usually have immediate execution time.
→ Once prices match, trades are completed instantly.
→ This contributes to high market liquidity.
→ Example: Shares bought and sold instantly during trading hours.
• Each exchange defines a tick size.
→ Tick size is the smallest allowed price movement.
→ This prevents random or meaningless price changes.
→ Example: In US stock exchanges, the tick size is $0.01.
• Exchanges also define a contract tick size.
→ Contract tick size = tick size × contract (lot) size.
→ This determines the smallest value change of a contract.
→ Example: $0.01 × 100 shares = $1 minimum contract price movement.
• Delivery terms apply mainly to commodity and derivative exchanges.
→ They specify how and when the asset must be delivered.
→ This avoids disputes between buyers and sellers.
→ Example: Gold contracts specifying delivery location and date.
• Quality standards are set for assets traded on exchanges.
→ Assets must meet predefined specifications.
→ This is crucial for physical commodities.
→ Example: Gold purity or diamond grading requirements.
• Physical assets must be in a deliverable and transferable form.
→ This ensures smooth settlement of contracts.
→ Assets must be ready for ownership transfer.
→ Example: Certified gold bars instead of raw gold.
• The standardisation of contracts ensures transparency and consistency.
→ All investors trade under the same rules.
→ This builds trust in the market.
→ Example: Identical futures contracts traded by all participants.
• Exchange markets are considered the most liquid market structure.
→ High trading volume and fast execution allow easy entry and exit.
→ Investors can buy or sell without major price changes.
→ Example: Highly traded stocks with continuous buying and selling.
One-Line Exam Answer
Exchange markets are automated, centralised platforms where standardised securities are traded through order book matching, ensuring transparency, efficiency, and high liquidity.
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KembaraXtra-Islamic Finance-Islamic Capital Market – Broker Market
A broker market is a category of the secondary (and sometimes primary) market where transactions are completed only when a buyer and a seller are successfully matched as counterparties, with brokers acting as intermediaries.
1. Role of counterparties
• A broker market functions effectively only when both a buyer and a seller are found.
• The broker’s main task is to match these two parties.
• Without a matching counterparty, a transaction cannot take place.
Simple explanation: A broker cannot sell shares unless another investor is willing to buy them.
Example: An investor wants to sell shares of a company, and the broker searches for another investor willing to buy at an agreed price.
2. Difference from dealer markets
• In broker markets, the broker does not usually act as a counterparty.
• A dealer can act as a counterparty, but this is not the core feature of broker markets.
• Brokers mainly act as agents, not principals.
Simple explanation: Brokers connect people; dealers trade using their own money.
Example: A stockbroker finds a buyer for your shares but does not buy them himself.
3. Impact on liquidity
• Liquidity in broker markets depends on how quickly a suitable counterparty can be found.
• The longer it takes to find a buyer or seller, the lower the liquidity of the market.
• Broker markets may therefore be less liquid than dealer markets.
Simple explanation: If it takes time to find someone to trade with, buying and selling becomes slower.
Example: Rare bonds may take days to find a buyer, reducing liquidity.
4. Historical background
• Traditionally, stock markets operated as brokered markets.
• Stockbrokers physically gathered on trading floors to match buy and sell orders.
• This created the classic image of stock exchanges like Wall Street, with traders shouting prices and recording orders manually.
Simple explanation: Trading used to be done face-to-face before electronic systems existed.
Example: Brokers yelling “Buy!” and “Sell!” on the trading floor.
5. Use in securities trading
• Broker markets are used for many types of securities.
• They are especially suitable for new or initial issues, where buyers and sellers are not yet well established.
Simple explanation: When a security is new, brokers help find interested investors.
Example: A newly issued bond needs brokers to locate initial buyers.
6. Role in IPOs
• During an IPO, investment banks often act as brokers to find subscribers.
• Shares are offered to potential investors through brokerage efforts.
• This helps ensure the issue is successfully subscribed.
Simple explanation: Brokers help connect new companies with investors during IPOs.
Example: An investment bank markets an IPO and collects applications from investors.
7. Use in bond markets
• Broker markets are also applied to certain bond issues, especially newer or less liquid bonds.
• Brokers help identify buyers and sellers when direct trading is difficult.
Simple explanation: Bonds without active trading rely on brokers to find counterparties.
Example: A newly issued corporate bond is sold through broker networks.
8. Suitability for customised products
• Broker markets are ideal for tailored or customised financial products.
• These products may not have standardised prices or large trading volumes.
• Brokers negotiate terms between buyers and sellers.
Simple explanation: Custom products need negotiation rather than instant trading.
Example: A customised Sukuk structure negotiated between an Islamic bank and institutional investors.
One-Line Exam Answer
A broker market is a market where brokers act as intermediaries to match buyers and sellers, with transactions depending on finding suitable counterparties, making it suitable for initial issues, bonds, and customised financial products.
A broker market is a category of the secondary (and sometimes primary) market where transactions are completed only when a buyer and a seller are successfully matched as counterparties, with brokers acting as intermediaries.
1. Role of counterparties
• A broker market functions effectively only when both a buyer and a seller are found.
• The broker’s main task is to match these two parties.
• Without a matching counterparty, a transaction cannot take place.
Simple explanation: A broker cannot sell shares unless another investor is willing to buy them.
Example: An investor wants to sell shares of a company, and the broker searches for another investor willing to buy at an agreed price.
2. Difference from dealer markets
• In broker markets, the broker does not usually act as a counterparty.
• A dealer can act as a counterparty, but this is not the core feature of broker markets.
• Brokers mainly act as agents, not principals.
Simple explanation: Brokers connect people; dealers trade using their own money.
Example: A stockbroker finds a buyer for your shares but does not buy them himself.
3. Impact on liquidity
• Liquidity in broker markets depends on how quickly a suitable counterparty can be found.
• The longer it takes to find a buyer or seller, the lower the liquidity of the market.
• Broker markets may therefore be less liquid than dealer markets.
Simple explanation: If it takes time to find someone to trade with, buying and selling becomes slower.
Example: Rare bonds may take days to find a buyer, reducing liquidity.
4. Historical background
• Traditionally, stock markets operated as brokered markets.
• Stockbrokers physically gathered on trading floors to match buy and sell orders.
• This created the classic image of stock exchanges like Wall Street, with traders shouting prices and recording orders manually.
Simple explanation: Trading used to be done face-to-face before electronic systems existed.
Example: Brokers yelling “Buy!” and “Sell!” on the trading floor.
5. Use in securities trading
• Broker markets are used for many types of securities.
• They are especially suitable for new or initial issues, where buyers and sellers are not yet well established.
Simple explanation: When a security is new, brokers help find interested investors.
Example: A newly issued bond needs brokers to locate initial buyers.
6. Role in IPOs
• During an IPO, investment banks often act as brokers to find subscribers.
• Shares are offered to potential investors through brokerage efforts.
• This helps ensure the issue is successfully subscribed.
Simple explanation: Brokers help connect new companies with investors during IPOs.
Example: An investment bank markets an IPO and collects applications from investors.
7. Use in bond markets
• Broker markets are also applied to certain bond issues, especially newer or less liquid bonds.
• Brokers help identify buyers and sellers when direct trading is difficult.
Simple explanation: Bonds without active trading rely on brokers to find counterparties.
Example: A newly issued corporate bond is sold through broker networks.
8. Suitability for customised products
• Broker markets are ideal for tailored or customised financial products.
• These products may not have standardised prices or large trading volumes.
• Brokers negotiate terms between buyers and sellers.
Simple explanation: Custom products need negotiation rather than instant trading.
Example: A customised Sukuk structure negotiated between an Islamic bank and institutional investors.
One-Line Exam Answer
A broker market is a market where brokers act as intermediaries to match buyers and sellers, with transactions depending on finding suitable counterparties, making it suitable for initial issues, bonds, and customised financial products.
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KemmbaraXtra-Islamic Finance-Islamic Capital Market – Dealer Market
A dealer market is a category of the secondary market where trading takes place electronically through dealers, rather than by direct interaction between buyers and sellers, as seen in auction markets.
1. No physical convergence of investors
• Unlike auction markets, dealer markets do not require buyers and sellers to meet or converge in one place.
• Trading is conducted electronically through dealer networks.
Example: Investors trade shares online through dealer platforms without meeting each other.
2. Trading is facilitated by dealers
• Dealers act as intermediaries who stand ready to buy and sell securities.
• Investors trade with dealers, not directly with other investors.
Example: An investor buys shares from a dealer instead of another investor.
3. Example of a dealer market
• NASDAQ is a well-known dealer market.
• It operates through an electronic system where multiple dealers quote prices.
Example: Technology stocks traded on NASDAQ are bought and sold through dealers.
4. Dealers maintain an inventory of securities
• Dealers keep a stock (inventory) of securities that they are willing to trade at any time.
• This allows immediate buying or selling without waiting for another investor.
Example: A bond dealer holds government and corporate bonds ready for sale.
5. Dealers quote buy and sell prices
• Dealers announce:
6. Dealers provide liquidity
• By being ready to trade at all times, dealers provide liquidity to the market.
• Investors can buy or sell securities without delay.
Example: An investor can sell a bond immediately because a dealer is willing to buy it.
7. Dealers use their own capital
• Dealers risk their own money by holding securities in inventory.
• This exposes them to price changes.
Example: If bond prices fall, the dealer may incur a loss on inventory held.
8. Dealers earn profits through spreads
• Dealers make profits from the difference between the buying and selling price.
• This difference is called the spread.
Example: Buying a bond at $99 and selling it at $101 gives the dealer a $2 profit.
9. Transparency in pricing
• Dealer prices are publicly displayed, ensuring transparency.
• Investors can compare prices offered by different dealers.
Example: Online trading platforms show multiple dealer quotes for the same security.
10. Competition among dealers
• Multiple dealers compete by offering better prices.
• Competition helps ensure fair pricing for investors.
Example: One dealer lowers the selling price to attract more buyers.
11. Strong presence in currency and bond markets
• Dealer markets are more active in:
12. Use in derivatives and standardised contracts
• Dealer markets are preferred for:
13. Foreign exchange market as a dealer market
• The foreign exchange (FX) market operates mainly through dealers.
• Banks and currency exchanges act as dealer intermediaries.
Example: A bank quotes exchange rates and trades currencies with clients.
One-Line Exam Answer
A dealer market is a secondary market where dealers trade securities from their own inventories, provide liquidity, quote transparent prices, and earn profits through bid–ask spreads, with strong application in bond, currency, and derivative markets.
A dealer market is a category of the secondary market where trading takes place electronically through dealers, rather than by direct interaction between buyers and sellers, as seen in auction markets.
1. No physical convergence of investors
• Unlike auction markets, dealer markets do not require buyers and sellers to meet or converge in one place.
• Trading is conducted electronically through dealer networks.
Example: Investors trade shares online through dealer platforms without meeting each other.
2. Trading is facilitated by dealers
• Dealers act as intermediaries who stand ready to buy and sell securities.
• Investors trade with dealers, not directly with other investors.
Example: An investor buys shares from a dealer instead of another investor.
3. Example of a dealer market
• NASDAQ is a well-known dealer market.
• It operates through an electronic system where multiple dealers quote prices.
Example: Technology stocks traded on NASDAQ are bought and sold through dealers.
4. Dealers maintain an inventory of securities
• Dealers keep a stock (inventory) of securities that they are willing to trade at any time.
• This allows immediate buying or selling without waiting for another investor.
Example: A bond dealer holds government and corporate bonds ready for sale.
5. Dealers quote buy and sell prices
• Dealers announce:
- a bid price (price at which they will buy)
- an ask price (price at which they will sell)
• This quoted range is known as the price spread.
Example: A dealer may quote $99 to buy a bond and $101 to sell it.
6. Dealers provide liquidity
• By being ready to trade at all times, dealers provide liquidity to the market.
• Investors can buy or sell securities without delay.
Example: An investor can sell a bond immediately because a dealer is willing to buy it.
7. Dealers use their own capital
• Dealers risk their own money by holding securities in inventory.
• This exposes them to price changes.
Example: If bond prices fall, the dealer may incur a loss on inventory held.
8. Dealers earn profits through spreads
• Dealers make profits from the difference between the buying and selling price.
• This difference is called the spread.
Example: Buying a bond at $99 and selling it at $101 gives the dealer a $2 profit.
9. Transparency in pricing
• Dealer prices are publicly displayed, ensuring transparency.
• Investors can compare prices offered by different dealers.
Example: Online trading platforms show multiple dealer quotes for the same security.
10. Competition among dealers
• Multiple dealers compete by offering better prices.
• Competition helps ensure fair pricing for investors.
Example: One dealer lowers the selling price to attract more buyers.
11. Strong presence in currency and bond markets
• Dealer markets are more active in:
- foreign exchange
- bond markets
• These markets require high liquidity and continuous trading.
Example: Government bonds are commonly traded through dealers.
12. Use in derivatives and standardised contracts
• Dealer markets are preferred for:
- futures
- options
- derivatives
• Standardisation makes dealer-based trading efficient.
Example: Currency futures are traded through dealer systems.
13. Foreign exchange market as a dealer market
• The foreign exchange (FX) market operates mainly through dealers.
• Banks and currency exchanges act as dealer intermediaries.
Example: A bank quotes exchange rates and trades currencies with clients.
One-Line Exam Answer
A dealer market is a secondary market where dealers trade securities from their own inventories, provide liquidity, quote transparent prices, and earn profits through bid–ask spreads, with strong application in bond, currency, and derivative markets.
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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- 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.
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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.
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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-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-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 -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.
