Islamic Capital Market

An Islamic capital market, as is the case of a conventional capital market, constitutes an integral part of the Islamic financial system. In general, an Islamic capital market comprises two main components: the debt market and the equity market. They are indispensable for the efficient mobilisation of resources and their optimal allocation. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Development


Sukuk Structure

Commonly, there are four types of contracts that are frequently used in sale-based sukuk: BBA, murabahah, salam and istisna’. BBA and murabahah are widely used in Malaysia. From the Shari'ah perspective, both concepts refer to a sale transaction of goods that are in existence. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Partnership-based sukuk, structured using mudarabah and musharakah contracts, do not represent debt receivables; rather they represent rights in specific investment projects or assets. Since partnership-based sukuk are not debt, their trading on the secondary market is not generally a sale of debt. For further details see: SUKUK: Principles and Practices.

إمكانية صياغة صكوك مشاركة تمويل محفظة

The most common structure of sukuk ijarah applied in the market is a sale and leaseback structure. Thus, an issuer that wants to raise sukuk would have to identify assets to sell and leaseback. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Resolution No. 137 (3/15): Sukuk Al-ijarah
Resolution No. 110 (4/12): "Lease Ending with Ownership and Leasing Bonds"
قرار رقم: 196 (2/21) بشأن استكمال موضوع الصكوك الإسلامية
Ijarah Sukuk And Shari’ah-compliant Securities As Underlying Assets In Tawarruq Transactions

Sukuk can be structured in various ways in accordance with the nominated contract which is approved by the Shari'ah and that suits the preference of issuers. Sukuk can accordingly be designed using the agency structure based on the contract of wakalah. The agency contract is selected for the purpose of managing and investing the proceeds generated from the sukuk issuance. This contract is called wakalah bi al-istithmar. For further details see: SUKUK: Principles and Practices.


AAOIFI Shari’ah Resolutions: Issues On Sukuk
Sukuk Murabahah of a Company That Mines Gold
Resolution No. 156 (5/17): The Completion Of Sukuk Al-Musharakah: The Components Of Its Assets
The Final Statement And Decision Of the 22nd Al-Baraka Forum On Islamic Economics: Kingdom of Bahrain, 1423 H.A., 2002
قرار رقم: 196 (2/21) بشأن استكمال موضوع الصكوك الإسلامية
قرار 188 (3/20) بشأن استكمال موضوع الصكوك الإسلامية
قرار رقم 178 (4/19) بشأن الصكوك الإسلامية ( التوريق ) وتطبيقاتها المعاصرة وتداولها
آلية أخذ الموافقة الشرعية للعمل بالصكوك الإسلامية
إمكانية صياغة صكوك مشاركة تمويل محفظة
Resolution No. 181 (19/7): Regarding endowing shares, sukuk, material rights and benefits

Issues and Challenges

According to Moody’s definition, asset-backed ṣukūk are those whose “investors enjoy asset-backing; they benefit over some form of security or lien over the assets, and are therefore in a preferential position over other, unsecured creditors. In other words, in the event the issuer were to default or become insolvent, the noteholders would be able to recover their exposure by taking control of and ultimately realising the value from the asset(s). It also requires the element of securitisations to be present―true sale, bankruptcy remoteness and enforceability of security. On the other hand, asset-based ṣukūk are those for which “the originator undertakes to repurchase the assets from the issuer at maturity of the Sukuk, or upon a pre- defined early termination event, for an amount equal to the principle repayment. In such a repurchase undertaking, the true market value of the underlying asset (or asset portfolio) is irrelevant to the Sukuk noteholders, as the amount is defined to be equivalent to the notes. In this case, noteholders have no special rights over the asset(s) and rely wholly on the originator’s creditworthiness for repayment, either from internal sources or from its ability to refinance. For further details, see ISRA Research Paper; Parallels between Asset-Backed Ṣukūk and Securitization (IRP8).

Currently, sukuk are viewed as debt instruments. Thus, investors will usually require a return based on a spread over a certain benchmark. If we recall the SABIC deal, for example, it was priced at three months SIBOR plus 0.40%. In many global sukuk deals, LIBOR is a frequently used benchmark. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Can the Bank Inform the Investor of His Expected Profit in Commodity Murabahah with Variations Based on the Currency Used?
Is It Permissible for Two Parties to Agree to a Currency Exchange at a Price Different from the Prevailing Rate?
Contractual Price of Istisna'a Linked to the Period of Execution
When a Government Agency Hires a Contractor to Build Housing for Citizens, Is It Lawful for the Citizens to Request Changes to the Basic Plan if They Agree to Pay for Them?
The price of the purchased commodity (Muslam Fih)
Change of the contract price due to additions in the required work
Is It Permissible for KFH to Round the Fractions Off to the Nearest Whole Number Profit Rate or Should KFH Take the Percentage as It Is?
Is It Permissible for KFH to Sell Machines on a Murabahah Basis and Include the Price of Assembly Expenses in the Contract or Must They Be Deducted from the Machine’s Price?
Is It Permissible for KFH to Increase the Rate of Murabahah in Upcoming Deals with a Customer Who Frequently Make Late Payments of the Murabahah Installments?
Is It Permissible for KFH to Sell Something by MurÉbaÍah at a Profit Rate to Be Agreed Upon on the Day of Delivery?
Is It Permissible for a Person (Principal or Agent) to Quote a Price for Goods Before Taking Ownership of Them?
Agent = Buyer = Seller
Is It Permissible to Add a Ratio to the Price Against Any Delay in Payment But in Case Payment Is Completed on the Due Date This Ratio Would Be Discounted for the Customer?
Is It Permissible to Advertise a Deferred-Payment Sale by Mentioning the Spot Price and Deferred Price of a Particular Commodity?
Dollars Are Purchased at Different Prices on the Same Day; Which Price Should the Customers Be Charged?
Ibra’ In Variable Rate Bai` Bithaman Ajil Product
A Discount for Accelerated Payment in a Delayed Payment Contract
A Shari‘ah-Compliant Alternative to an Option Contract
Does the Customer Who Purchased a Car Have a Right to Benefit from the Discount Given to KFH After Completion of the MurÉbaÍah Deal with Him?
What is the Shariah View on How to Calculate the Sale Price in a Murabahah Transaction?
SETTING TRADERS’ PROFITS by Dr Yūsuf al-Qaraḍāwī
Resolution No. 174: Adding a profit rate to the price quote of a commodity that the client wishes to purchase in murābaḥah
Can a Contractor Renegotiate to Get a Lower Price from Its Subcontractors without Passing the Discount to the Customer Who Accepted Its Original Price?
Can the Murabahah Seller Raise the Markup if the Deal Involves Advance Payment That Will Extend the Deal’s Timeline?
Charging the Purchase Undertaker for Assembly of Purchased Equipment
Delay in Setting the Profit Margin of a Murabahah Sale to the Day of Delivery
Delay in Setting the Profit Margin of a Murabahah Sale to the Day of Delivery
Does the Buyer Have a Right to the Discount Given to the Intermediate Seller?
Giving the Bank’s Accountholders a More Attractive Price than Non-Customers
How to Calculate the Selling Price in Murabahah
How to Calculate the Time-Value of Funds in Determining a Murabahah Price?
If Damage to the Ordered Goods Causes a Reduction in the Price, Does It Affect the Profit Asked?
Increasing the Profit Rate on Subsequent Murabahah Deals Due to Late Payments in Earlier Deals
Must the Intermediate Seller in Murabahah Pass a Discount on to the Purchase Undertaker?
Rounding up the Profit Rate if a Murabahah Deal is Paid off Earlier than Agreed
Shortfall in a Good Sold by a Calculation of the Amount
The Buyer Discovers a Defect in the Goods
The Intermediate Seller Lacks Detailed Knowledge of the Imported Goods
The Purchase Undertaker Does Not Want the Intermediate Seller to Incur Added Expenses for Insurance against Certain Risks (1)
The Purchase Undertaker Wants to Pay the Difference in Price between What the First Seller is Charging and What the Intermediate Seller is Willing to Pay
معالجة عمولات فتح الاعتمادات/ التحصيل في حالة تمويل المرابحة الخارجية
عمولة الموردين عن السلع المبيعة
تحمل المشتري البضاعة المراد شراؤها بالمرابحة
إعطاء الموظفين قروضًا حسنة أو تمويلهم بربح أقل
تحويل عملية مرابحة فاسدة إلى قرض حسن
Incidental Murabahah Expenses
Owning Goods Before Selling It
Revision Of Murabahah Price
Various Issues
What Expenses Can Be Factored into the Price to Which the Mark-up is Added
What if the Buyer Asks the Installer to Implement Design Changes during Installation, and Only Informs the Seller after the Fact?
What is the Difference between Musawamah and Murabahah?
What Is to Be Done if the Original Seller Does Not Deliver the Good to the End Buyer?
When the Customer Can Be Charged for Shipping and Insurance
When the Purchase Undertaker Is a Distribution Agent for the Exporter
Debts Where Shares Are The Subject Matter
In a salam contract, to what extent is the buyer allowed to obtain a promise to buy at a specific price from a third party
The Issue Of Pricing The Subject Matter Of A Forward Sale Contract
A Penalty Clause for Delay in a Murabahah Contract
Resolution No. 46 (8/5): The Maximum Profit Margin For Traders
Paying for Real Estate with a Combined Payment of Cash and Real Estate
Offering a Discount for Paying on Time in a Deferred Purchase Sale
Quoting Different Prices to the Client for Different Payment Periods
Who Bears Unexpected Demurrage Charges in a Murabahah Contract?
Purchasing Printed Material with Agreed Specifications for Deferred Delivery

The rating of Sukuk represents the evaluation of default risk of an issuer and/ or Sukuk. This is usually done by special companies called Credit Rating Agencies (CRAs). For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

Sukuk are typically structured similar to conventional bonds with respect to their exposure to the risk of default. However, the remedial options to mitigate this risk in the form of restructuring may be more challenging for sukuk. Since sukuk are a recent innovation in the capital markets, issues such as how to unwind, restructure or enforce Shari'ah-compliant instruments and entities pose more difficulties than conventional securities. For further details see: SUKUK: Principles and Practices.

The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 160th Meeting
جدولة كامل الدين أو جزء منه بالتراضي أو تطبيقًا لحكم قضائي
إعادة جدولة الديون
مدى جواز تسجيل المبالغ الزائدة عن أصل الدين ضمن أرباح البنك
Extension of Murabahah Period
Increasing A Murabahah Contract’s Period And Consideration
Murabahah Debt Restructuring with Central Banks as Guarantor
Settling The Debt Of A Murabahah With Another Murabahah

Islamic Equity Market

Islamic Equity Market Instruments are Shares or Stocks, Stock Index Futures, Short-selling, Islamic Real Estate Investment Trusts
(REITs), Islamic Exchange Traded Funds (Etfs). For further details see: Islamic Financial System; Principles and Operations.

Shari’ah stock screening is a process that filters a pool of stocks from a particular database separating those stocks that conform to Shari’ah principles from those that do not. Shari’ah screening is a process of distinguishing between Shari’ah compliant and Shari’ah non-compliant investments; compliant investments conforming to the principles of the Shari’ah and non-compliant investments that are tainted, according to Shari’ah principles. For further details, see Shari'ah Stock Screening: A brief outlook.

Deferred Sales of Shares in a Company Whose Cash Assets Exceed Its Tangible Assets
Resolution No. 122 : Management of a stock portfolio
Circulation of Shares
Trading In The Shares Of Shari’ah-Compliant Companies That Are Involved In Riba-Based Transactions With Conventional Banks
Resolution No. 181 (19/7): Regarding endowing shares, sukuk, material rights and benefits

Equity market indices are a mainstay feature of all established equity capital markets the world over. Such an index is basically a number computed, in real time, to reflect the current price level of its designated components. It is often used as a benchmark or bell weather of the performance of a given stock exchange. The indices are frequently quoted in the media when reporting on the performance of equity markets. These indices are also commonly discussed by financial analysts and stock market observers. Famous indices include the Dow Jones, Standard & Poor’s 500 and the NASDAQ in the US, FTSE 100 in the UK and the Nikkei in Japan. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Although Islamic and conventional funds have similar economic objectives - such as pooling investors, preserving the capital and optimising returns - they are different in essence and structure, particularly in terms of: investible universe, role of Shari'ah advisor, purification, fee structure. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

Valuation is a process of determining the intrinsic or the “true” value of equities in order to assist investment decisions of buying or selling a stock. In other words, how are the prices of securities determined in the market and do these market prices reflect their intrinsic value? The purpose of valuation is to determine the real meaning of the disclosed profit or to determine the true future value of the security, company or asset. Valuation not only helps us to understand the real value but also what are the sources of the value. Valuation is also important for the issuing companies as it can illustrate successful company operations, e.g., during the launch of a new product and to establish the company’s performance track record. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Bursa Malaysia define Islamic stock broking services as 'the business of trading in securities carried out by an Islamic participating organisation on the stock market of Bursa securities, whether on full-fledged basis or via an Islamic window services'. In other words, Islamic stock broking is an alternative trading mechanism for investors to invest in shares and securities based on Islamic principles. For further details see: Islamic Equity Market, Securities Commission Malaysia.

Using a Brokers to Find a Lessee
Can a Broker’s Fee Be Recovered if a Sale is Terminated?
Can Someone Who Finds Clients to Lease Property Charge a Fee for Doing so?

Venture Capital: venture capital is typically provided to new, high potential, growth companies in the interest of generating a return through a realization event, such as an initial public offering (IPO) or a trade sale of the company. Venture capital investments are generally made in the form of cash in exchange for shares of the venture company (invested company). (Securities Commission Malaysia, 2008: 122).

Private Equity (PE) is the investment of funds into a private company with the potential growth, giving the investor an opportunity to realise huge returns upon sale of the company later. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.


Crowdfunding


Islamic Structured Investment Products

Equity-Linked Notes (ELNs) are the most applied in SIPs in both Islamic and conventional markets. An (ELN) is a type of SIP with its returns tied to the performance of an underlying equity, which can be a single stock, a basket of stocks or an equity index. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

Interest Rate-Linked Notes (IRLNs) are capital-protected instruments where the interest and additional returns are linked to the performance of the underlying interest rate index. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

A Commodity-Linked Note (CLN) is a type of SIP where the return is tied to the performance of a commodity or basket of commodities over a certain period. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices. 

This is a type of SIP which offers fixed income returns where the coupon or maturity payment is tied to the performance of an underlying which may be a single foreign currency, a basket of foreign currencies or FX futures. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

Credit-Linked Notes (CLNs) are SIPs where the principal repayment and coupons are linked to the creditworthiness of the issuer and a third party (known as the reference entity). For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

Bond-Linked Notes (BLNs) are a type of SIP where the coupon is tied to the performance of an underlying bond. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

شراء البنك أذونات خزانة بناء على طلب البنك المركزي

Primary Market


Secondary Market


Contra Trading


Issues and Challenges

Ownership means the recognition by the Sharīʿah of people’s ability to utilise a thing (ʿayn) or a benefit (manfaʿah) by making use of it directly, by exchanging it, or by giving it freely to someone else, thus excluding all encumbered disposition.

Is It Permissible to Engage in a Sale Contract on Deferred Basis with a Client Who Directly Communicated with the Producer Abroad to Send Certain Goods?
Will Shipping the Goods on the Request of the Purchase Undertaker Be Considered as Only Taking Possession Without Ownership?
What Are the Rules of Taking Possession in Currency Trading with Regard to the General Practices of Banks?
The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 156th Meeting
A Discrepancy is Found in Murabahah Goods That Were Sold before Possessing Them
Any Link between the Insurance Settlement for Damaged Goods and the Seller’s Settlement with the Purchase Undertaker?
RESOLUTION No. 76/7/8: PROBLEMS OF ISLAMIC BANKS
Resolution No. 112: The permissibility of transferring the title of the leased property to the lessee and perfecting a lien on the property
Resolution No. 120: Putting the name of the Corporation in newspaper ads along with the names of agencies selling cars by installments
Resolution No. 151: the Corporation appointing the purchaser as an agent to determine and receive what he will eventually buy
Resolution No. 152: The Trade Line Scheme that the Corporation wishes to use in dealing with its clients
Resolution No. 157: The Corporation selling ready-mixed concrete
Resolution No. 159: The Corporation selling gold, silver and currencies to its clients
Resolution No. 161: The permissibility of the seller of a commodity to Al Rajhi providing a guarantee of the party purchasing from Al Rajhi
Buying A Portion Of A Land Through Murabahah
Can a Contract Be Signed with a Purchase Undertaker before the Official Ownership Transfer Procedures Are Completed? (1)
Can Real Estate That Is Bought and Resold Be Registered Directly in the Final Buyer’s
The Bank Uses the Purchase Undertaker’s Import License to Purchase a Foreign Good
The End Buyer Wants to Pay the Original Seller a Sum to Settle a Price Dispute between the Original Seller and the Intermediate Buyer
The Purchase Undertaker Does Not Want the Intermediate Seller to Incur Added Expenses for Insurance against Certain Risks (2)
Transporting The Subject Matter Under The Name Of The End Customer
Using Murabahah to Finance Charitable Projects
دفع الزكاة عن أرباح أموال المساهمين أو الاحتياطيات
Deferred Installment Sale: Issue Of Selling Assets That Is Not In One’s Possession And Compensation For Refusal To Buy The Subject Matter
Insurance Premium
Murabahah Mudawwarah: Actual Or Constructive Possession
Resolution No. 50 (2/6): Rulings on Installment Sales
Cancelling A Murabahah Contract
Ensuring Proper Separation Of Contracts
Murabahah With Exporting And Importing Companies
Owning Goods Before Selling It
Revision Of Murabahah Price
What Is to Be Done if the Original Seller Does Not Deliver the Good to the End Buyer?
What Is to Be Done in Murabahah about Anomalies in Delivery of the Subject of the Sale?
Deferring the Ownership Transfer of Shares Sold
The Buyer Asks the Seller to Store the Purchased Goods in His Warehouse
Selling Land That the State Has Decided to Buy, after Valuation but before Sale
Selling Goods Recorded as Accounts Receivable before the Invoice is Settled
Purchase Option Such That the Seller Will Only Acquire Possession of the Good if the Buyer Exercises the Option
Can Real Estate That Is Bought and Resold Be Registered Directly in the Final Buyer’s Name?
Signing a Contract to Sell Something to the Government before Owning the Product
Is It Allowed to Take Security for a Debt before the Debt is Incurred?
Is Storage in Public Warehouses with Certificates Detailing the Specifications of the Commodities Considered Possession that Allows Resale?
Signing a Contract to Sell Something to the Government before Owning the Product

Literally: to take something, to own, to possess. Technically: to take possession of something, physically or constructively, according to custom. Some said: to grant access and remove any actual obstructions [to physical possession] according to custom. Its essence is to be able to freely dispose of what is possessed. For further details see ISRA Compendium.

Dollars Are Purchased at Different Prices on the Same Day; Which Price Should the Customers Be Charged?
Resolution No: 13 (1/3)[1]: Concerning The Islamic Development Bank’s inquiries
A Shari‘ah-Compliant Alternative to an Option Contract
Buying Gold That Has Been Deposited with the Buyer
Can a Customer Islamically Transfer a Traveler’s Check to Another Person in the Same Currency?
What Is the Rule on Purchasing Gold Jewelry Set with Gems on a Deferred Basis?
Is It Permissible to Give a Discount to the Client on the Whole Quantity from the Beginning of the Signing of Contracts When the Commodity and the Payment for It Are Delivered in Stages?
Is It Permissible to Buy Goods Which Are on a Ship at Sea by the Testimony of the Carrier and Then to Sell These Goods by Making the Carrier an Agent?
What Is The Shariah Ruling on a Sale Contract When the Price Is Collected Before the Goods Reach the Country?
Will Shipping the Goods on the Request of the Purchase Undertaker Be Considered as Only Taking Possession Without Ownership?
Is It Permissible to Deliver the Goods Which Have Arrived Before Their Documents to the Client in a Murabahah Agreement?
What Are the Rules of Taking Possession in Currency Trading with Regard to the General Practices of Banks?
What Are the Rules Regarding Conditions Governing Murabahah Contract?
Is It Allowed to Buy Agricultural Products or Any Minerals Other Than Gold or Silver Which Is in the Actual Possession of the Seller?
A Discrepancy is Found in Murabahah Goods That Were Sold before Possessing Them
Resolution No. 65: Repurchasing checks issued by the Corporation to correspondent banks overseas
Resolution No. 120: Putting the name of the Corporation in newspaper ads along with the names of agencies selling cars by installments
Resolution No. 152: The Trade Line Scheme that the Corporation wishes to use in dealing with its clients
Resolution No. 157: The Corporation selling ready-mixed concrete
Resolution No. 159: The Corporation selling gold, silver and currencies to its clients
Resolution No. 161: The permissibility of the seller of a commodity to Al Rajhi providing a guarantee of the party purchasing from Al Rajhi
Selling Goods Based On Its Specifications
The Customer Colludes with the Bank’s Agent to Get Financing by a False Sale
Deferred Installment Sale: Issue Of Selling Assets That Is Not In One’s Possession And Compensation For Refusal To Buy The Subject Matter
Murabahah Mudawwarah: Actual Or Constructive Possession
Hibah In The Takaful Industry
Murabahah Structure
Murabahah+Agency
Owning Goods Before Selling It
What Is to Be Done if the Original Seller Does Not Deliver the Good to the End Buyer?
What Is to Be Done in Murabahah about Anomalies in Delivery of the Subject of the Sale?
When the Goods Arrive before Their Shipping Documents
A Commodity Purchase Option
Appointing the Original Seller as an Agent, and Making Him a Guarantor for the Price
The Buyer Asks the Seller to Store the Purchased Goods in His Warehouse
Selling The Subject Matter Of Salam Before Its Possession
Selling Gold Jewelry Set with Gems by Deferred Payment
What Constitutes Possession (Qabd)?
Is Storage in Public Warehouses with Certificates Detailing the Specifications of the Commodities Considered Possession that Allows Resale?
A Discrepancy is found in Murabahah Goods That Were Sold before Possessing Them
Is It Allowed to Take Security for a Debt before the Debt is Incurred?
Is Storage in Public Warehouses with Certificates Detailing the Specifications of the Commodities Considered Possession that Allows Resale?

Speculation, in practice, takes place as a result of holding securities for relatively short durations, called day trading. For further details see: ISLAMIC CAPITAL MARKETS: Principles & Practices.

Short-selling refers to the practice of the sale of securities (in this case, shares) not absolutely owned by the selling party at the time of sale. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Market liquidity can be defined as "the ability to trade an asset at short notice, at low cost and with small impact on its price". For further details see: Measuring and Managing Liquidity Risk.


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