CHAPTER - 7 Conclusionshodhganga.inflibnet.ac.in/bitstream/10603/11410/16/16_conclusion.pdf · Islamic economic thought is the fundamental order of every economic activities of Muslim.

268

CHAPTER - 7

Conclusion

It is now established that Islamic finance is one of the most shining phenomena of

the present global financial realm. It started from small saving business occurring here and

there within Muslim communities around the globe throughout the second half of last

century. Till now Islamic finance is the fastest and highest growing segment of global

financial realm. Moreover since the start of this century Islamic finance has greatly

diversified form its traditional banking business to financial market and so on. Now Islamic

finance spends around the world. Its producers are ranging from a traditional financial

banking business product as savings to very demand or custom made finance product such

as profit rate swap and other derivative instruments. Within this rank many producers are

active in the market called Islamic financial market. Obviously the Islamic financial market is

a kind of market that performs all functions as conventional financial market where

financial assets are traded. These market functions provide economic prosperity by

providing the means to creation and allocation of credit and liquidity, mobilization

intermediary, price setting, asset valuation, raising capital, risk management, etc. Although

financial market can also be classified in many ways, but, the market is generally

categorized as follow. Debt and equity market: when the financial asset trading in the

market is categorized by term of the claim nature of financial asset. Money and capital

market: when the financial asset trading in the market is categorized by term of maturity

date. Primary and secondary market: when the financial asset trading in the market is

269

categorized by term of seasonal feature of financial market. Cash and derivative markets:

when the financial assets trading in the market are categorized by term of delivery action of

financial contract.

Although, Islamic financial market as financial medium, has performed all the

functions that provided by conventional financial market, but Islam is the religion that

claims to be the way of life that governs all aspect of human activities. Islam has provided

guidelines and rules to its adherent for every sphere of life and society material as well as

spiritual. Hence, Islam also has a set of rules towards the economic activities of its subjects.

Islamic economic thought is the fundamental order of every economic activities of Muslim.

Although, the fundamental subject of every economic thought has common ground that to

satisfy the needs of human and maintain social order at the same time. However, different

worldviews of different thoughts lead to different approaches that they use for fulfilling

their subject matter. In other economic thoughts people are free to satisfy their need by

any means they see fit. In contrary, Islam teaches that one isn’t free to satisfy one wants or

as one wishes but one must satisfy one’s needs under guidelines that is provided by Allah

(SWT).

These guidelines are conveniently called Islamic law or Shariah law. Generally,

Shariah law is the law that incorporates the rules of Muslim life for all kinds of aspects

economically, socially, and religiously. In fact Shariah law has been developed on the basis

of two main sources. First priority and supreme are those sources that came up during the

prophet’s lifetime and are known as the holy Quran and the Sunnah. These two very basic

sources of Islam contained a number of economic principles and many detailed economic

270

teachings. The Quran is the absolute supreme source of Shariah law. Muslims believe it is

the word of Allah (SWT) that was revealed to the Prophet Muhammad (PBUH). The holy

Quran composes of 144 chapters or Suras in Arabic term. In fact the most of the holy Quran

is not dealing with the provision of law but beliefs and moral conduct. Only about 500

verses out of 6342 verses deal with the provision of law. The Sunnah of the Prophet

Muhammad (PBUH) is other primary source of Shariah law. It is referred to normative

model behavior of the Prophet Muhammad (PBUH) which consists of the Prophet’s saying,

deeds, and his silent approval. It plays an important role in Shariah law as it provides details

and clarity of example that has been generalized in the holy Quran verses. In addition to the

first two main sources, Ijma and Qiyas are the other sources of Shariah law. They have

inferior status to the holy Quran and Sunnah as they were derived from the first two main

sources, the holy Quran and Sunnah. Ijma is regarded as the third source of Shariah law.

Ijma is consensus of the Muslim religious scholars of a given generation to formulate

independent judgment in a legal question based on the holy Quran and Sunnah, when the

Muslim community faces a problem that its explicit result can’t be found in the holy Quran

and Sunnah. The last source of Shariah law is Qiyas. Qiyas is a term which means to use

human reasoning to apply an existing legislation, in the holy Quran, the Sunnah and Ijma

with new circumstance, when the rationale of legislation is known, other similar cases can

be judged according to the same rationale.

Since Islamic economic thought unlike other economic thought that give

absolute attention to the mundane aspect or material gain, Islamic economic thought value

economic activities with spiritual norms of Islam. Hence the Islamic economic system lays its

271

entire feature on the base of norms which were already provided by Shariah law. The

prominent feature of Islamic economics on production, consumption, and wealth

distribution is raised from the core teaching that Allah (SWT) owns all resources and man is

only a trustee in their use. Therefore, man is not completely free to utilize but the use of

those resources are limited by Allah’s order. Thus Islamic economic teaching limits man’s

freedom to use of the resources by taking Allah’s order into account. The order leads to the

concept of Halal and Haram which is the most distinctive features of Islamic economic

teaching against other economic thought. On the one hand, Halal refers to any object or any

actions which are permissible to use or engage and Haram refers to anything that is

prohibited by Allah (SWT) on the other hand. Believer can earn his livelihood only through

Halal mean. As far as Islamic finance is concerned, Riba and usury transactions are Haram

and prohibited. Alongside with Riba financing, a social harmful activity and other Islamic

prohibited products such as pork, arms and intoxicate are seriously prohibited. Shortly

speaking, Islamic economic teaching has limited the believer’s freedom to involve in

business and financial transactions on the basis of a number of prohibitions, ethics, and

norms. Besides major prohibitions, Shariah law has prescribed a number of other norms and

boundaries in order to avoid inequitable gains and social injustice. As a rule, Shariah has

determined some elements which must be avoided in commerce or business transactions.

In this regard, the prohibition of Riba, Gharar and gambling are the strictest factors that

define invalid and voidable contracts. Gharar and gambling or Qimar in Arabic term are

other prohibited elements that are not allowed to exist in any Islamic contract and

transaction. Gharar refers to excessive uncertainty of contract rise from doubt about trade

272

item, price of commodity, quantity, deliver date of commodity and contract condition.

Element of Gharar may lead contract parties to fail to fulfill their obligation.

Principles of Islamic finance have existed since fourteen centuries ago, but the

history of modern Islamic finance is very recent. In fact, the principle of Islam towards

financing matter is spread over the Islamic civilization and its common principle of business

finance spread from late 6th to early 11thcentury. However, Islamic Empire started to decline

since 11th century the superiorities of economic and politics in global sense were gradually

transferred from the hands of Muslims to the westerners who began dominating the world.

From the mid-nineteenth century, nearly every Muslim country stayed under, direct or

indirect influence of Western powers. Therefore most countries adopted the dominant

models in all spheres. Then the centuries-old models of Islamic finance were replaced by

western financial system which was based on interest based philosophy.

In the modern context, banking is the first mode of finance that the Muslim world

began to recover since 1920s. But initially all attempts were theoretical works. Until 1950s,

the idea was first put into practical action with the establishment of Farmers Credit Unions

in a rural area of Pakistan. However, the first high profile experiment was conducted by The

Mit Ghamr Savings Bank, an Egyptian interest free financial institution, during 1963. At the

same time, Muslim Pilgrims Savings Corporation, well known as Tabung Hajj or The Pilgrims

Management and Fund Board, was established by the Malaysian government as a non-bank

financial institution. The milestone of Islamic finance can be pinned on the establishment of

Islamic Development Bank (IDB). As a result of the OIC summit in Lahore in 1974, IDB was

established as inter-governmental institution. The new institution aims to promote Islamic

273

financial industry through direct participation, training and advice and, the creation of new

Islamic financial institutions. Subsequently, Islamic finance started to grow since then.

Recently, most Muslim countries and some non-Muslim countries have inspired the

creation of Islamic financial institutions, aiming to pursue the national interests within

financial area. Specially, Malaysia has adopted a new idea of Islamic financial development.

Rather than using what was generally acceptable in Islam as a starting point of its Islamic

financial development, Malaysians chose to generate new Islamic financial innovation with

the help of Ijtihad of the Malaysian Ulema in a vast effort to legitimate modern finance,

specially effort on designing interest-free bonds and other securities. Although, many

Malaysian innovations in that area are not deemed acceptable to Shariah boards in many

conservative Gulf States, However these innovations nourish Islamic financial development

particularly in Islamic financial markets.

Since early Islamic financial institution was set up nearly 40 years ago. Islamic

finance has expanded to become a unique segment and fast growing segment of the global

banking and capital markets. Now Islamic finance is not a confined affair to only in its

traditional business as banking but has been diversified to wide range of financial activities.

At present, there are approximately more than 200 Islamic banking institutions operating

over 70 countries and 50 Islamic insurance companies operating in 22 countries around the

world. These figures exclude a number of investment houses, mutual funds, leasing

companies and commodity trading companies. Also are excluded a large number of Islamic

financial institutions engaged at local level. Potential market of Islamic finance is very large

as its basic potential customers are Muslims with approximately 1.2 billion populations

274

around the world. With this size of potential customer, Shariah-compliant products provider

is not confined only to Islamic financial institutions but many conventional financial

institutions around the world as they visualise Islamic finance as new potential revenue with

high rate of market expansion. Thus Islamic finance has become more and more integrated

with the international financial system. Islamic financial services industry has been

experiencing rapid evolution and expansion. Its growth is not only in the Muslim world, but

across the Western world as well. In Europe Islamic banking and finance is steadily invading

into the mainstream finance. The main reason for this development has been that the

conventional financial institution realise the high business opportunity of market expansion

of Islamic finance. They aim to serve the needs of European Muslim customers estimated to

be more than 50 million and also Muslim client from outside Europe, looking for Halal

management of their financial affairs through the Islamic finance approaches. UK, France,

and Germany are the major European countries that have dealing with Islamic finance.

Surprisingly, UK is the eighth largest global center for Islamic finance and a strongest Islamic

finance in Europe. Although most developments of Islamic finance in UK are very recent,

but the practice of Shariah- compliant transactions in UK can be traced back to the 1980s.

With the intention to make London as an Islamic financial service center, UK made many

adjustments in its financial regulation to boost Islamic finance, change tax and stamp duty

on Islamic mortgages. Germany has been the first European country that gained Islamic

financial market experience with the launch of 100 million euro Sukuk in 2004. However,

unlike major European players, Germany remains reluctant to embrace Islamic finance

within its legal and tax systems. Many obstructions for development of Islamic finance have

275

been found in German Banking Act; such as not providing permission to adapt to the

principle of profit-and-loss sharing in banking business. Despite the volume of Islamic

finance being limited in the West, its development is already having a major impact on the

Islamic finance industry worldwide. In the West, the climate for innovation is more

favourable than in much of the Islamic countries, at least because of the better protection

of intellectual property rights. The Islamic Bank of Britain was the first Islamic bank

anywhere to offer Murabaha treasury deposit accounts. France and Germany, which are

counted among developed countries, have been changing their attitude towards Islamic

finance. They have begun to change their financial regulations in favour of Islamic finance.

This will accelerate development of Islamic finance, in these countries.

The potential growth of Islamic finance in South East Asia is very high with the huge

potential market as the fact that this region contains more than 200 billion of Muslim

population. However, with exception of Malaysia, Islamic finance in all other countries is in

the initial stage. To boost its country as regional financial centre, Malaysia declared itself as

dual banking system with 1983 Islamic banking Act which allowed Islamic banking and

conventional banking to coexist side by side. Followed by the introduction of Islamic debt

securities market in 1990, Islamic Interbank Money Market, and a cheque clearing system

was established in 1994. Also an Islamic equity market, the world’s first Islamic stock index

has been operating in Malaysia since 1995. Malaysia is leading player and innovator in

Islamic financial market as many Islamic financial market innovations were first launched in

this country such as first global sovereign Islamic bond or Sukuk in 2002, the first provincial-

government global Sukuk in 2004, the first Islamic mortgage-backed securities , and the

276

world’s first Islamic real estate trust fund in 2005 . Malaysia hosts the world’s largest Sukuk

market, with Malaysian Sukuk accounting for about 61 per cent of the total global Sukuk

outstanding at the end of 2008 and share of 53 per cent of global issuance at the same year.

Referring to stock market; Malaysia had 855 Shariah-compliant stocks at the end of 2008

and constituted as 86 per cent of listings with a market capitalization of 213 Bullion US

dollars. Indonesia is one of the biggest Muslim populations in the world. However, the

awareness of Islamic finance came comparatively late and has slow development as

compared to other counties that have Muslim majority in the region. This situation of slow

incoming of Islamic finance was caused by various factors such as the syncretic nature of

Islam in Indonesia. It has meant a more than relaxed attitude towards the Shariah, and

Indonesia’s secular constitution which clearly separates religion from State administration.

Most of the developments in Islamic finance took place in late 90s.

GCC region is the heart of Islamic finance in many aspects as its member countries

are wealthy with Muslim majority and generate strong demand for Islamic finance. The

value of Shariah-compliant assets is impressive in the GCC with total assets worth over

262.6 billion US dollars or 41 per cent in comparison with total 640 billion US dollars of

Islamic assets worldwide at the end of 2007. The kingdom of Bahrain is one of the global

leading centres of Islamic finance. It has largest number of Islamic financial institutions in

the Middle East; Including 26 Islamic- banks and 19 Islamic insurance companies. In

addition, Bahrain is also a leading Sukuk market including short-term government Sukuk as

well as leasing securities. The government and corporate Sukuk outstanding value are

estimated approximately 3.5 billion US dollars at the year 2008. The Bahrain’s mutual funds

277

have also exhibited outstanding performance with 87 Islamic funds operating in the

kingdom. The net asset value of these funds reached 1.3 billion US dollars by 2008. The

kingdom is also active in developing the Islamic capital market. The Islamic International

Financial Market (IIFM) was setup in 2002 to promote and develop the Islamic capital and

money market. The institution’s initial objective was to establish product standard and

minimum documentation for certain money and capital market products. In addition,

Bahrain is also host to other Islamic financial development organizations such as the

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Liquidity

Management Centre (LMC), and the Islamic International Rating Agency (IIRA). Kuwait has

been a centre for Islamic financial Institution since 1970s, but it was only recently that the

country enacted Islamic financial law. Kuwait is considered as a late GCC member that

enacted Islamic financial law. Despite lack of legal framework, Islamic financial services

grew substantially as Kuwait has the world’s highest per capita concentration of Islamic

financial institutions. Specifically, Islamic financial institutions accounted for 30% of total

assets in Kuwait’s banking and financial service sector in 2008. However, Kuwait Sukuk

market is relatively small compared with another GCC states, because of its lack of

regulations. Qatar is the other hot spot of Islamic banking and finance services in the region.

Islamic banking is the major sector of the country’s Islamic financial services. Qatar Islamic

Bank is the major sponsor of Mutual Funds in Qatar. Doha Securities Market is playing an

important role in promoting Islamic capital and secondary markets in the country. The

Qatar Financial Centre (QFC), established in March 2005, is also playing significant role in

promoting Islamic finance at regional and international levels. Unlike other states in GCC,

278

Saudi Arabia’s Islamic finance industry is comparatively of low standard as the kingdom has

no responsible official body. Thus in Saudi Arabia, the customers have to choose Islamic

financial product on their own confidence towards the company’s board of Shariah of that

product. Regarding to standardization, few Saudi planners seem to be worried about the

problem, as Saudi is not worried to become the global or regional centre for Islamic finance

as its neighbouring countries. Its domestic demand is robust enough to support a thriving

sector of its own.

Islamic financial service in Africa seems to have a bright future, with the continent

containing 412 million Muslim inhabitants. However, the profile of Islamic financial service

in Africa is not significant. Even though one of the pioneers of this field was located in this

continent as earliest Islamic banking was conducted in Egypt since 1960s. But overall

Shariah-compliant banking and finance is a recent phenomenon on the continent. At

present, approximately 37 Islamic financial institutions operate in Africa. The worth of

Shariah-compliant finance in Africa was only 18 billion US dollars at the end of 2007,

equating to a market share of less than 8 per cent globally. The poor performance of Islamic

finance in Africa comes from two reasons. Firstly, there is indifference between Islamic

finance and conventional finance in view of customers due to the fatwa issued by Al-Azhar

University. Secondly, the reluctance of North African politicians to give strong support to

the development of Islamic finance as it is viewed as a model largely imported from the

eastern part of the Arab world. In sub-Saharan region, Mauritania, Gambia, Senegal,

Guinea, Niger, Liberia and Djibouti, have had limited access to Islamic finance as each

country contains only one full-fledged Islamic bank.

279

South Asia is the birth place of idea of modern Islamic finance since 1920 and it is

home to several hundred millions Muslim population. Pakistan and India combined

together, the Muslim population is estimated at nearly 400 million. However, Islamic

finance industry of this region is not thriving as it should be. In Pakistan, although Pakistan

started Islamization of its financial system since 1970 and most of significant practical steps

were taken during 80s but the attempt failed to success. Due to this, the system could not

offer the flexibility tool and lacked the appropriate means to ensure Shariah Compliance.

Moreover all the participants were not ready to roll when the time came to launch. Pakistan

re-launched the introduction of Islamic Banking system again in 2001 when the government

decided to promote Islamic banking in line with best international practices with more

flexible approach. In India, Islamic financial industry is considered very poor as compared to

other major Muslim communities. Since Indian banking law and regulations do not support

Islamic banking industry, this has put Islamic banking as almost an unviable option. However

Islamic equity investments seem to have bright future in this country. Large number of

companies being listed on the Indian stock exchange are conforming to Shariah investment

principle. As a report shows that the capitalization of Shariah-compliant stocks are more

than 50 per cent in two main Indian stocks exchange, NSE and BSE.

Islamic finance in Russia and Central Asian has been characterized by poor

performance and low customer commitment. Although there are estimated to be around

16 million Muslim populations in Russia, Islamic finance could not flourish due to many

facts. First Russia is characterized by fast growing Islamophobia and officials who have such

attitude usually link Islamic financial institutions with a terroristic threat. Second important

280

reason is lack of demand for Islamic finance in Russian market as the Russian Muslims are

not aware of Islamic prohibition of interest. In Central Asia, the countries such as

Kyrgyzstan, Kazakhstan and Azerbaijan, demonstrated a strong interest in Islamic financial

services. The main reason for strong interest of these states is the problem of liquidity in

each country. The money accumulated in domestic market is not enough, so they turned

out to find additional financing from foreign markets. Their main attention of Islamic

financial industry is to attempt to trap surplus funds from foreign Muslim investors specially

from GCC region. The growth of Islamic finance in North America differs from other parts of

the western countries. In North America, Islamic financial products were developed in

response to the demand of local Muslim communities rather than to trap the demand of

global Islamic finance. The Islamic financial institutions in US and Canada focus on providing

home finance and retail investment products to local Muslim communities. Although the

growth of Sukuk industry is massive globally but north America missed on this growth. So

far one Sukuk has been issued by a US-based company. Moreover, there are many countries

where domestic demand is very limited such as Singapore, Sri Lanka, and Japan but they are

starting to provide Islamic financial service. With the same reason many financial centres

such as Australia, UK, French, Germany and Central Asian countries are promoting Islamic

financial industry, both to serve local Muslim populations and to attract Gulf capital.

Since Islamic banking and finance has many unique features such as Riba prohibition

or Gharar contract banning, it requires unique products or means to run its business. These

products and means are distinguished in nature and feature from their conventional

counterpart. Thus the machine and tools to conduct Islamic financial activities are very

281

unique. Instead of using interest as a core driver, Islamic finance uses other approaches

based on Islamic idea. The approaches can be classified into three categories, Profit and loss

sharing based instruments, Sale based contract instrument and lease based contract

instrument. Profit and loss sharing is an ideal principle Islamic financial institution to run its

business or to build an Islamic financial product. The main concept of this method is that

instead of using interest rate as basic rate of return of capital that financier always wins

profit in any business situation and environment which is considered unfair in the light of

Shariah law. The method suggests fair sharing of profit or loss between the contract parties.

Thus return of capital is result out of capital using performance, whatever profit or loss, is

fairly divided between the contract parties. In profit and loss sharing approach, there are

two instruments called Mudarabah and Musharakah. Musharakah and Mudarabah are

original form of Islamic financing methods which were performed before Islam and were

approved by Prophet Muhammad (PBUH) in his period. Mudarabah is the first financial

structure that was proposed to apply in Islamic banking business at the early stage of

Islamic economic and financial system reclamation. Using two tired Mudarabah structure as

backbone of their operation, the Islamic institutions on the one hand would receive

deposits fund as agent or mudarib of its customer and on the other hand provide finance to

its clients to act as rabb al mal or sleeping partner. Thus a banking system could run on

profit and loss sharing and remove interest out of system. However with necessity to add

more flexible Islamic financial tools and means, others two approaches, Sale based and

lease based approaches were introduced. The instruments based on these two approaches

are not original form of the Islamic finance. They were derived from Shariah Sale principle

282

such as Murabaha, Istisna, Salam, and Ijarah. Although there are various kind of Islamic

financial instruments and each instrument has its own Shariah requirement for validity. But

the sharing features or requirements are risk taking for gaining return without Riba.

Islamic finance has unique rules, restrictions and requirements regarding the

business and investment. In order to be acceptable, any transactions must adhere to the

principles under Shariah. Since most of the prevailing financial systems are predominantly

based on the conventional legal system which may or may not have the provisions for

handling special treatment of Shariah rules, the development of supportive legal and tax

codes, and of a homogeneous regulatory framework based Shariah law is crucial for the

success of Islamic financial service industry. Since Islamic banking and finance system is

relatively new. It is not homogeneous in many aspects. The system is still not unifying in

practice and regulation. Over the years, a number of Islamic financial institutions have been

created to provide the positive development to Islamic financial industry. These institutions

have contributed many efforts that result in the accelerated growth of Islamic finance

industry. Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

was created to provide accounting and auditing standards for various Islamic financial

contracts. The International Islamic Financial Market (IIFM) was established to promote

Islamic financial markets by providing global standard and cooperative framework for the

market and to ensure the continued growth of the market in line with Shariah rules and

principles. International Islamic Rating Agency (IIRA) provides an assessment of the risk

profile of Islamic financial companies as well as their financial products that can be used for

investment decisions. IIRA does rating, evaluating, enhances and accelerates the growth of

283

Islamic financial market. Liquidity Management Center (LMC) enables Islamic financial

institutions to manage their liquidity through short and medium term liquid investments by

providing secondary markets that are structured in conformity to the Shariah laws. General

Council of Islamic Banks and Financial Institutions (GCIBFI) enhances market understanding

of Islamic finance. Islamic Financial Services Board (IFSB) is working as international

standard setting of regulatory and supervisory agencies that have main interest in ensuring

the effective performance and stability of the Islamic financial institutions that indirectly

contribute to the working of the Islamic capital market. Last but not least, Islamic Research

and Training Institute (IRTI) supports and furthers the development of industry by

promoting Islamic finance research and training.

During past decade, momentum of Islamic financial industry has very much changed

in the area of financial market. The Sukuk market is one area of Islamic finance that attracts

lot of interest from global community. Although at the very first appearance, Sukuk was

introduced to be an Islamic alternative for Islamic investors who were looking for Islamic

financial instrument that was equivalent to conventional bond. However, with the different

natures of Islamic and conventional financial ideology, the Sukuk has been developed to be

a distinguishing one. Therefore, Sukuk is distinguished from conventional bonds in many

aspects. The differences such as It is not free to issue but only to support Halal activities,

Sukuk cannot be issued to finance Islamic prohibited activities, or the principal return in

Sukuk is not guaranteed in form of interest rate but performance of underly project.

However, the most distinguishing aspect that completely separate Sukuk from conventional

bonds is that Sukuk provides the ownership right for the Sukuk holder toward tangible

284

underly asset. Thus nature of Sukuk is not debt obligation as conventional bonds but a

certificate of ownership share in underly object. To transfer ownership right from originator

to Sukuk holder, Special Purpose Vehicle (SPV) became the heart of every valid Sukuk

structures as it operates as agent of Sukuk and prevent the underly assets from originator’s

bankrupt affects.

Structure of Sukuk is free to be created as long as conditions of valid Islamic financial

contracts are maintained. Such Sukuks are permitted to be created on loan contract, but it

must be interest free loan contract. Since benefit to the lender in a loan contract is

considered as a form of Riba which is prohibited by the Shariah, therefore Sukuk use loan

contracts because there is no value-added return to the investors. Thus the structure of

Sukuk has been built around Islamic financial principle such as Musharakah, Mudarabah,

Murabaha, Ijarah, Istisna, and Salam. The most preference structure to build Sukuk is Ijarah

as the Ijarah structure has dominated international market as 45 per cent of international

Sukuk. While domestic Sukuk market has been dominated by Murabaha Sukuk as 30 per

cent of domestic Sukuk is constructed on Murabaha principle.

This situation occurs because of two reasons, first is that Malaysia constitutes 67 per

cent of total global domestic market. Another reason is that Malaysia allows practice of bai

al-dayn which is considered as trade of debt and not accepted by Shariah board outside

Malaysia. Therefore, Ijarah Sukuk has become popular international Sukuk markets as it is

tradable Sukuk structure in secondary market outside Malaysia. However, Malaysia still is

the biggest market of Sukuk as it occupies over 58 per cent of total global Sukuk issuance.

Although, investment form GCC is an important source of Sukuk demand, however, as

285

individual country domestic Sukuk market is relative very small as compared with Malaysia

and Sudan. However, as a group GCC domestic Sukuk is worth around 16 Billion US dollars

or 16 per cent of total global market. Major domestic Sukuk markets in this region are Saudi

Arabia and UAE, the two markets account for 85 per cent of GCC domestic market.

However, Bahrain Sukuk market is the most active market in the region. Domestic Sukuk

markets in the rest of the world are small as the worth is not exceeding even one billion US

dollars. Some countries such as Brunei Darussalam, Gambia, US, Germany and Singapore

have never entered the international Sukuk market. In contrary to domestic Sukuk, GCC is

the biggest market of international Sukuk. As in 2009, GCC Sukuk was almost 80 per cent of

international markets. GCC market share is far beyond its Asian counterpart which accounts

for only 15 per cent. This situation might come from the fact that Malaysia, the global

biggest player, has given most of its attention toward domestic Sukuk as the issue of Ringgit

dominant Sukuk can help Malaysia to retain and boost the position of Malaysian Ringgit.

In the world of Shariah-compliant finance, Sukuk was an outstanding phenomenon

of the past decade as the market grew almost 200 fold within one decade. Sukuk have

bright future as some of 1,000 billion US dollars GCC’s infrastructure investment

programme will be financed through Sukuk over the next decade. However, many

challenges are waiting ahead. The issue such as lack of market liquidity, lack of standard and

practical uniform still remain. The illiquidity issue relate to “buy-and –hold” investments

strategies that limited supply of Sukuk in secondary markets as well as effect to deficient

price discovery and information dissemination. Market lack of global standard and uniform

286

practice, still remain although, some standard of regulatory body such as Accounting and

Auditing Organization for Islamic Financial Institutions (AAOIFI) is widely accepted but

different standard still exists as can be pointed out in case of bai al-dayn. At the end of this

decade, again the serious issue of lack of standard was brought into attention when some

Sukuk such as East Cameron Gas Sukuk was default and the Nakheel Sukuk the biggest value

Sukuk was nearly to default. These issues point out the fact that there does not exist

faultless and defaulters Sukuk instrument. The Sukuk market has to evolve mechanisms to

take care of these defaults in its future growth.

In addition to Sukuk market, Shariah-Compliant Stock, Funds and Derivative Product

are other components of Islamic Financial Market which gradually gained attention from

market participants. Before 1990s, most part of the Muslim investors were not involved in

any stock market investments due to Islamic prohibition of certain business activities.

However, during 1990s breakthrough event took place in religious rulings related to equity

investment when attitude of Islamic jurisprudents towards equity investment got changed.

Consequently Shariah-Compliant Stocks and other relative products started to prosper. The

Islamic-compliant stock market is essentially part of a broader Islamic capital market

in which the activities being carried-out are guided by the Islamic law or Shariah.

After recent global financial crisis, the Islamic equity market is segment of the Islamic

financial market that has been receiving more and more attention. As the conventional

equity market remains in doldrums due to the prolonged effects of the global financial crisis

at the time, the demand for the Islamic equity market, Sukuk Islamic fund and other Islamic

financial products are more in demand . It was estimated that by August 2011, the size of

287

Shariah-compliant stock kicked 19,995.5 billion US dollars in terms of market capitalization

and more than 2500 companies were being listed on the Dow Jones Islamic World Index.

The biggest market of Shariah-Complaint Stock is those markets in developed countries as

1576 out of 2591 stocks in global index listed in developed market index and market

capitalization of developed markets are 13,000.8 billion Us dollars out of 19995.5 billion Us

dollars on global scale.

The guidelines governing the Islamic financial markets are establishing basic

principles that govern the rights and obligations of the participants in the Islamic financial

markets which built on two main sources of Quran and Sunnah . However, some difference

of opinion towards particular matter may occur as defined by the respective Shariah

scholars. Thus these matter criterions have slight differences in a particular market screen

criteria. However, the main difference between the conventional and Islamic financial

products is that all the transactions in the Islamic financial market could not involve in

Haram activities such as alcohol, tobacco, pork-related products, conventional financial

services. Furthermore those elements that could result in exploitation and unfair gains

must be avoided or at least minimized to meet the requirement of Shariah law according to

particular screen criteria, thus interest (riba), excessive ambiguity (gharar), and gambling

(maysir) must be avoided or minimized. Although the prohibited activities are almost the

same but SEC Malaysia is exception, in SEC Malaysia index, business corporation that deal

with both permissible and non-permissible business can be listed by two additional

criterion; the corporations public perception and Benchmarks of Tolerance ratio imposed on

288

business corporation that dealing in both Shariah and non-Shariah activities, the certain

ratio of revenue of non-Shariah before tax.

Benchmarks of Tolerance are:

25 per cent if the corporations have element of Maslaha (public interest)

such as hotel and resort operations

10 per cent if the corporations have element of Umum Balwa (common

plight and difficult to avoid) such as interest income from fixed deposits in

conventional banks.

5 per cent for in case of the activities that are clearly prohibited by Shariah

law

Financial ratio is one aspect that has divergence among Shariah-screens such as

Debt to Market Cap and Liquid Assets to Market Cap. The difference between Shariah-

screens is the degree of ratio which one can see the detail in chapter 6. However, the most

distinguishing is SEC Malaysia that excludes Market Cap and Liquid Assets to Market Cap

ratio from its criterion.

Since, considerable numbers of Shariah-Compliant Stock and Islamic investors are

setting their place on capital market as equity investment was widely accepted by Shariah

scholars. Shariah-compliant funds started to appear. The mile stone of development in the

Shariah-compliant fund industry occurred in late 1990s when various global index providers

such as the Dow Jones, S & P and other regional and national level Index providers started

to offer the reliable equity benchmarks for Islamic products. Islamic funds have started

289

prosperity since then. Shariah-compliant funds are not being only a halal investment

alternative available for Muslim investors but now the funds also respond to the specific

need for more liquid investment tools. The number of Islamic funds are growing as in 2011

the fund number was estimated to be more than 800 funds. Generally, Islamic funds are

managed and conducted on two basis methods Mudarabah basis and, Agency basis. It can

be categorized by structure such as equity funds, Ijarah funds, commodity funds, Murabaha

funds and property funds and, mixed funds. The most common type of Islamic funds is

equity funds which accounted 39 per cent of total asset management by Islamic funds. With

a high growth rate, the funds industry is still small and shows many challenges that have to

be solved. The majority of the funds are considered very small in size compared to the

conventional funds; most of them are smaller than 25 million US dollar assets. The funds

markets still depend on few investment institutions as two-thirds of total new funds were

launched by few institutional investors. These problems may lead the market to market

vulnerability and market illiquidity.

In the domain of Islamic financial market, derivative instruments are very rare

experience. It is entirely new segment of Islamic financial market as it first appeared in 2004

in Malaysia. Notable development was occurring in Malaysia when two Malaysia’s bank,

Bank Islam and Bank Muamalat Malaysia, made agreement to execute a derivative master

agreement for documentation of Islamic derivative transactions in November 2006. And

Deutsche Bank executed the first Islamic Collar Profit Rate swap with Dubai Islamic Bank

(DIB), the transaction was over 500 million US dollars in notional value In October 2007.

290

At present, although the debate on Islamic derivatives is going on in many aspects,

a number of Islamic institutions are actively using them as the risk management tool and

starting to offer these Shariah compliant derivatives to their clients. The potential growth is

expected as the strong acceptance of these instruments is highlighted by the trend toward

their worldwide standardization. The recent launch of ISDA/IIFM Tahawwut Master

Agreement is a new mile stone of the industry that is expected to be foundation of

development of Islamic derivative and hedging instrument in over-the-counter Shariah

compliant derivatives market in the future.