Islamic Capital Market Instruments and Products
Introduction to Islamic Capital Market
At its heart, the Islamic Capital Market is one where transactions for Shariah-compliant financial assets are handled. This system functions in correspondence to the conventional market while encouraging and enabling investors to seek Shariah-compliant investment opportunities; whereas a traditional capital market simply enables investors to make investments, and borrowers to find funds to borrow.
For those that wish to only invest and carry out transactions in the Islamic capital market, there are several products they can avail. Islamic Capital instruments and products enable financial activity from remaining activity without disobeying Shariah.
Islamic Capital Market Products
Following are the 7 key Islamic Capital Market products:
1. Mudaraba Sukuk
Certificates representing ownership in investments managed on the basis of Mudaraba. An essential form of profit-sharing in Islamic finance, Mudaraba sits on a foundation made by agreement between capital providers and entrepreneurs, or essentially, the “executioners”. With the establishment of an enterprise aimed towards generating "halal" profit, both parties share profit on an agreed ratio. The condition is that, if the enterprise goes into loss, the monetary investor bears these losses, whereas the executioner simply receives no reward for his invested knowledge and time.
2. Ijara Sukuk
The fundamental concept of Ijara Sukuk is that the owners of an asset are investors that are authorized to collect a fee in return for leasing that asset. In simple words, this is essentially a rental or lease contract granting the right to use an asset in return of payment.
3. Partnership Sukuk
A market system based on the principles of equal partnership.
4. Ordinary Stocks
Same as common stocks or shares which represent the basic voting shares within a company or corporation. The holder of an ordinary share is usually entitled to one vote per share. Through the system of ordinary stocks, equal ownership is made apparent with the system of distributing shares in accordance to shareholder’s percentage ownership in the company.
5. Preferred Stocks
Everything other than the aforementioned shares of a company's stock are, by definition, preferred stocks or shares.
6. Mutual Funds
An investment vehicle consisting of funds collected by many investors for investment in securities such as stocks, bonds, money market instruments and other such assets. Professional money managers are hired to handle these funds and allocate the fund's investments with the intention of generating income for the fund's investors.
7. Single Stock Futures
Contracts between two investors where a buyer agrees to pay a specified price for numerous shares of one stock at a scheduled time in the future. In this system, the seller’s duty is to deliver the stock at a decided price at the future day point.
Just like the aforementioned, other elements of the Islamic capital market are also gradually coming into prominence. The already massive global economy is expanding by the day. Abandoning tradition however, is not a necessity to partake in this worldwide culture of progress. The Islamic capital market is a prime example of a system that integrates values of Islam and that of modernity and progress simultaneously. Islamic capital market instruments and products are discussed in Islamic banking courses, which are a part of diploma in Islamic banking program of AIMS.
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