KembaraXtra-Islamic Finance-Islamic Capital Market-Stock Market Indexes
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– Stock market indexes are used as indicators to track, analyse, and understand the overall performance of the stock market.
– They provide a simplified way to observe how a group of stocks performs collectively, rather than analysing individual stocks one by one.


– A stock market index is constructed using a selected group of representative stocks.
– These selected stocks act as a benchmark or performance indicator for the broader market or a specific segment of the market.
– Changes in the index value reflect movements in stock prices, helping investors gauge market trends.


– Stock market indexes are not only used for analysis but are also financially tradable instruments.
– Trading of stock market indexes occurs through:

• Options
• Futures contracts
  – These index-based derivatives are traded on regulated exchanges, allowing investors to hedge risk or speculate on market movements.

– Indexes help investors and policymakers:

• compare market performance over time
• assess economic conditions
• evaluate investment strategies

– Some of the major conventional and Islamic stock market indexes include:

• Dow Jones Industrial Average (DJIA)
• Dow Jones Islamic Market Index
• S&P 500
• S&P Islamic Index
• FTSE 100
• FTSE Global Islamic Index
• Nikkei 225
• NASDAQ Composite
• Hang Seng Index

– Islamic stock indexes consist only of Shari’ah-compliant companies, excluding businesses involved in prohibited activities and interest-based income beyond acceptable thresholds.

One-Line Exam Answer

Stock market indexes are benchmark indicators made up of selected stocks that measure market performance and are also traded through futures and options on regulated exchanges.

Kembaraxtra-Islamic Finance-Islamic Capital Market-Secondary Market

• The secondary market is where existing securities such as shares and Islamic bonds (Sukuk) are traded among investors.
• Securities must first be issued in the primary market before they can be traded in the secondary market.
• In the secondary market, no new securities are created; only already-issued securities are exchanged.
• Major global secondary markets include exchanges such as New York Stock Exchange, NASDAQ, S&P Islamic Indices, and Dow Jones Islamic Market Indices.
• Trading in the secondary market takes place without the involvement of the issuing company.
• When an investor buys a share in the secondary market, the payment goes to another investor, not to the company.
• The issuing company remains uninvolved and unaffected by secondary-market trades.
• The stock exchange facilitates the transaction process by matching buyers and sellers.
• Brokers and dealers act as intermediaries to execute trades on behalf of investors.
• The secondary market provides liquidity, allowing investors to buy or sell securities at any time.
• Securities in the secondary market can be sold multiple times, with no restriction on frequency.

Simple Example (How Trading Works)

• An investor wants to buy shares of a listed company.
• The order is placed through a broker on the stock exchange.
• The shares are purchased from another investor, not from the company.
• The seller receives the money; the buyer receives the shares.
• The company does not receive funds from this transaction.

Operational Categories of the Secondary Market

1. Auction Markets
• Buyers and sellers submit bids and offers.
• Prices are determined by supply and demand.
• Most stock exchanges operate as auction markets.

2. Dealer Markets
• Dealers quote buy and sell prices.
• Dealers trade from their own inventories.
• Prices are set by dealers rather than by auction.

3. Broker’s Markets
• Brokers act as agents.
• They do not trade on their own account.
• They earn commissions for matching buyers and sellers.

4. Exchange Markets
• Organised and regulated platforms.
• Trading occurs under standard rules and procedures.
• Provides transparency and investor protection.

Link to Primary Market


• Primary market issues new shares; secondary market trades existing shares.
• Primary market raises funds for companies; secondary market provides liquidity for investors.
• Underwriters act as intermediaries in the primary market; brokers act as intermediaries in the secondary market.
• Securities are sold once in the primary market but many times in the secondary market.


One-Line Exam Answer

The secondary market enables trading of existing securities among investors, provides liquidity and price discovery, and operates independently of the issuing company through organised exchanges and intermediaries.

Kembaraxtra—Islamic Finance-Islamic Capital Market -Funds from the Primary Market

Companies raise funds from the primary market through several recognised methods, each serving different financing needs.

1. Public Issue (Initial Public Offering – IPO)

• A public issue is one of the most efficient and widely used methods of raising funds in the primary market.
• It involves issuing shares to the general public for the first time through an Initial Public Offering (IPO).
• The company transitions from a private company to a publicly listed company.
• Securities issued under a public issue are listed on a stock exchange to enable public trading.
• Investors purchase shares directly from the company.
• Funds raised are used for expansion, business growth, and long-term investment.

Examples of Public Issue (IPO)

• A private manufacturing company lists its shares on the stock exchange to raise capital for building a new factory.
• A technology startup launches an IPO to fund research, development, and market expansion.
• A Shari’ah-compliant company issues shares through an IPO in the Islamic Capital Market to finance halal business operations.

2. Rights Issue

• A rights issue is a method where a company offers additional shares only to its existing shareholders.
• Shares are offered on a pro rata basis, meaning shareholders receive rights based on their current shareholding.
• The issue price is usually lower than the prevailing market price.
• The main objective is to raise additional capital at a lower cost.
• Existing shareholders are given priority, allowing them to maintain ownership proportion.

Examples of Rights Issue

• A listed company offers 1 new share for every 5 shares held to raise funds for debt reduction.
• A company facing temporary cash flow issues raises funds through a discounted rights issue.
• A Shari’ah-compliant listed firm issues rights shares to finance expansion into new halal markets.

3. Preferential Allotment

• Preferential allotment is a method where a listed company issues shares to selected investors.
• Shares are not offered to the general public.
• The issue price is not directly determined by the current market price.
• The company has the discretion to decide the price and recipients of the shares.
• This method is often used to raise funds quickly or bring in strategic investors.

Examples of Preferential Allotment

• A listed company issues shares to a strategic business partner to strengthen collaboration.
• A financially distressed company allots shares to institutional investors for quick capital injection.
• A Shari’ah-compliant firm issues shares to an Islamic investment fund through preferential allotment.

Kembaraxtra-Islamic Finance-Islamic Capital Market -Objectives of Primary Markets – Key Features Explained


1. Economic Role of the Primary Market

• The primary market plays a vital role in capital formation in the economy.
• It channels savings from individuals and institutions into productive business activities.
• Funds raised are used for expansion, production, infrastructure, and long-term investment.
• It supports economic growth by financing companies and industries.


2. Advantages of Listing

• Listing allows companies to raise large amounts of capital from the public.
• It increases the company’s visibility, credibility, and public image.
• Listed companies gain easier access to future funding through additional issues.
• Shares of listed companies become liquid, benefiting investors.


3. Conditions to Be Considered for Listing

• Companies must meet regulatory requirements set by stock exchanges and regulators.
• Financial transparency and proper disclosure of accounts are required.
• Minimum capital, profitability, and governance standards must be satisfied.
• Compliance ensures investor protection and market confidence.

4. Categories of Companies That List

• New companies seeking capital for the first time (IPO).
• Existing private companies converting into public companies.
• Already listed companies issuing additional shares (FPO).
• Companies may be classified based on size, sector, or growth stage.

5. Listed Products Other Than Shares

• The primary market does not deal only in equity shares.
• Other listed products include bonds, debentures, and Islamic instruments such as Sukuk.
• These products allow companies to raise funds without issuing equity alone.

6. Processes of Listing


• Appointment of advisors, auditors, and underwriters.
• Preparation and submission of required documents.
• Regulatory approval from stock exchange and authorities.
• Pricing, allocation, and public subscription of securities.

7. The Prospectus

• A prospectus is a legal disclosure document issued to investors.
• It provides information about the company, risks, financials, and objectives of fundraising.
• It helps investors make informed investment decisions.
• Transparency through a prospectus is mandatory in the primary market.
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8. Share Underwriting Issue

• Underwriting ensures that the company raises the required capital.
• Underwriters agree to buy unsold shares if the public does not subscribe fully.
• This reduces risk for the issuing company.
• It improves confidence among investors.


9. Additional Resources of Primary Market Issue of Registered Equity

• Registered equity issues provide companies with long-term financial resources.
• Funds raised strengthen the company’s capital base.
• These resources support expansion, diversification, and strategic investments.


10. Raising of Capital

• The primary objective of the primary market is capital raising.
• Companies obtain funds directly from investors.
• Capital raised is used for growth, innovation, and long-term projects.
• This distinguishes the primary market from the secondary market.


One-Line Exam Summary

The primary market facilitates capital formation by enabling companies to raise funds through public issuance of securities, supported by listing processes, disclosure requirements, underwriting, and investor protection mechanisms.

Kembaraxtra-Islamic Finance-Islamic Capital Market- Function of the Primary Market

• Investors who invest in equities do so by accepting an assumed level of risk.
• The primary equity market is economically designed to channel surplus funds into productive investments.
• Funds held by investors are redirected to companies that require capital for business expansion and productive activities.
• The price at which securities are issued reflects the estimated risk associated with the investment.
• There is a direct relationship between perceived risk and expected return in the primary market.
• Higher risk is associated with higher expected returns, while lower risk corresponds to lower expected returns.
• The primary market ensures that issued securities are priced in a manner consistent with their risk profile.
• The issue price set in the primary market plays a crucial role in ensuring market confidence and investment participation.
• The functioning of the primary market simultaneously establishes the need for secondary markets.
• Primary and secondary markets are therefore intertwined and interdependent.


Explanation of Primary Markets

• Corporates are the original issuers of shares or bonds in the primary market.
• Corporates approach banks to facilitate the issuance of securities.
• Banks operate on the sell side, acting as underwriters and intermediaries.
• Banks establish contacts between corporates and institutional investors.
• Institutions, such as fund managers, operate on the buy side of the market.
• Institutional investors pool funds from individual investors.
• Individual investors indirectly participate in the primary market through institutions or directly through subscriptions.
• Capital flows from investors to corporates through banks and institutions.
• Securities such as shares or bonds flow from corporates to investors.
• This flow ensures capital formation for companies and investment opportunities for investors.


Relationship Between Primary and Secondary Markets

• Companies list their shares on stock exchanges to obtain permanent capital.
• Funds raised through primary markets are used for long-term investments such as production facilities and equipment.
• These investments aim to generate returns for the company and its shareholders.
• Without secondary markets, primary market capital would become illiquid.
• Secondary markets provide liquidity and an exit mechanism for investors.
• The existence of secondary markets makes primary market investments more attractive.
• Secondary markets assist in correct price discovery of securities.
• Professional institutional investors play a dominant role in pricing efficiency.
• Smaller investors rely on institutional investors to maintain pricing discipline in the market.
• Investors can only trade shares after the company completes its IPO and sets the issue price.
• Trading activities in primary markets differ fundamentally from those in secondary markets.

​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.

​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.

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.
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