Islamic Capital Market Products
Capital market products satisfy customers’ investment need with the expectation of earning a favorable return. These products are based on the same principles as credit products. The long term funds are raised through capital market products which are conducted by both financial institutions and governments (e.g. share securities, bond, treasury etc.).
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.
- 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.
- Partnership Sukuk
A market system based on the principles of equal partnership.
- 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. In such stocks only those companies qualify whose debt is less than 30% or in some countries 10% of the total issue size.
- Preferred Stocks
Everything other than the aforementioned shares of a company’s stock are, by definition, preferred stocks or shares.
- 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.
- 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.
In Islamic economics, financing is based on the specific asset. In Islamic finance money is considered to be just a medium of exchange or a mechanism to complete the transaction. While in case of conventional finance this is not always the case and most of the time financing is currency-based. Equity-based financing in Islamic model is based on the sharing of business risks, as well as rewards by the bank and its client. Both parties contribute for the basic ingredients of a business venture such as capital, management, know-how, labor, and other related professional attributes. Profits are distributed based on an agreed profit distribution ratio while losses are prorated to each party’s capital participation. Equity financing is cemented by entering in either one of two contracts, namely a partnership contract and a trust financing contract. Shariah-compliant asset-backed securitization (ABS) delivers a risk-return profile similar to a conventional structure. However, conventional securitization was developed in non-Islamic economies and invariably involves interest-bearing debt. Other Islamic capital market products include equity market products, structured products and stock broking. Islamic equity market operates on the basis of equity participation by the investor. It includes the Islamic products like Shariah-compliant stocks, Islamic unit trusts, Islamic REITs (Real estate investment trusts) and Islamic index. Islamic structured investment products are customized products according to the need of the specific investor which can be a wealthy individual or a group of investors. The risk and reward of these products are designed to meet a specific objective. Generally two types of Islamic structured products are used in Islamic capital market; Dual currency structured Investment and Equity linked structured investment. In Islamic capital market, stock broking is done according to the Shariah principals. This part of Islamic capital market deals with Shariah-compliant trading and Shariah-compliant margin financing.
Insurance products (Takaful) allow individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship. People who want to protect themselves or someone else against financial hardship are considering insurance products (e.g. general and life insurance) . Many insurance companies have been established to offer Muslim individuals and business with insurance coverage. Islamic insurance is the mechanism through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants. One key Islamic insurance product is Takaful – Islamic insurance with joint risk-sharing. Muslim jurists have agreed that Takaful schemes are accepted by Islamic Shariah because it encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.