Potential of Islamic capital market

The history of Islamic capital market (ICM) is relatively new–only two decades. The Security Commission of Malaysia established it first in 1995. The growing awareness and demand for investment in accordance with Islamic principles have made the concept of ICM popular on a global scale.
Islamic capital market serves the function of a  capital market in general but only for Shariah- compliant financial assets. It works parallel to the conventional market and helps investors find Shariah-compliant investment opportunities.
The main objectives of ICM are –
i) To ensure equitable allocation of the capital sector and
ii) To ensure that surplus fund be attracted.
The above two objectives have to be achieved within the concept of Islamic Shariah. The ICM is an area that has grown to become an increasingly substantial segment within the global financial market and has gained considerable interest as a viable and efficient alternative model of financial intermediation. This is also a reflection of the increasing wealth and capacity of investors, both Muslim and non-Muslim, to invest in new investment products that serve their needs.
Islamic capital markets include longer term (normally more than one year) and riskier securities. Its major two segments are Sukuk and Stock. Sukuk is derived from Arabic word Sakk. Sukuk (plural of Sakk) means certificates. Generally, Sukuk paper (bond) is asset or equity- based, stable income, tradable and Shariah compatible trust certificates. Shariah considerations dictate that the pool of assets should not solely be comprised of debts from Islamic financial contracts such as Murabaha and Istisna.
ICM PRODUCTS WORLDWIDE: Malaysia is the most developed market for Sukuk at both the primary and secondary market levels. All types of Sukuk like asset-based Sukuk (under Salam, Istisna and Ijara modes), equity based Sukuk (under Musharaka and Mudarabah mode), sale-based Sukuk (under Murahaho, Istisna, Salam, Bai al Inah, Bai Muajjal), lease- based Sukuk (under Ijarah mode), partnership- based Sukuk (Mudaraboh and Musharokah) and agency-based Sukuk (Wakalah Bai Istithmar) more or less are present in the capital Market.
INVESTMENT DEPOSIT CERTIFICATES/SUKUK: These types of Sukuk are present in Kuwait, Sudan, Kenya, Gambia, Nigeria. The Kuwait Finance House has issued three types of investment deposit certificates. In Sudan, Faisal Islamic Bank of Sudan, Sudan Islamic Bank and the Islamic Cooperative Development Bank issue 'Investment Deposit Certificates' which are totally interest-free and based on Mudarabo. The holder of the certificates is fund provider (Saheb Al Mal) and the bank is entrepreneur (Mudarib). Profit is distributed as per agreed ratio and loss is borne by Saheb Al Mal.
MUQARADAH SUKUK/BONDS IN JORDAN: These Sukuks are issued by the Ministry of Endowments and Islamic Affairs in Jordan. A Muqaradah Sukuk is an instrument of a fixed value issued in the name of its holder against the amount of money contributed towards implementation of the project with the aim of making profitable investment. The instrument is transferable to a third party under intimation to the issuing party which thus registers the transfer of title.
Islamic Transactions Certificates in Egypt: These bonds are issued by the Islamic transactions branches of Bank Misr (Arab Republic of Egypt) for a nominal value of 1,000 Egyptian pounds (or US dollars) and their multiples. These Sukuks are issued for a term of five renewable years. The prospectus of these bonds states that they are to be invested in Islamic projects and the holders will determine the appropriate methods of investment on the basis of unlimited Mudaraboh rules.
IDB INVESTMENT CERTIFICATES: These are investment certificates issued for financing trade amount Islamic countries. These may also be used to finance certain other operations for specific purpose including leasing. Each certificate has a nominal value of one thousand US dollars and a term that is linked to portfolio term, which is 25 years. The liability of the certificate holders including the bank is limited to the value of the rights of each in the portfolio.
PARTICIPATION TERM CERTIFICATES IN PAKISTAN: These certificates are financial instruments issued by banks and financing institutions in Pakistan. These are negotiable certificates based on the principle and long-term financial resources in local currency for industrial and other projects. Furthermore, the participation certificate holders have the right to transfer a certain part of their certificates into ordinary shares of the issuing company. The regulations also stipulate that the issuing party may grant shareholders the right of purchasing participation term certificates.
INVESTMENT COUNCIL UNIT FUND CERTIFICATES IN BANGLADESH: These certificates are issued by the Investment Council in Bangladesh which is a government non-banking financing institution. The authority also arranges establishment of unit funds operating on the basis of Mudarabah. Each fund is totally independent in terms of assets or liabilities and has its own independent management. The fund's resources are mobilised through sale of the above mentioned certificates which are known as ICB Unit Certificates and ICB Mutual Certificates.
BANGLADESH GOVERNMENT ISLAMIC INVESTMENT BOND: The Bangladesh government introduced a Mudarabah bond named 'Bangladesh Government Islamic Investment Bond (Islamic Bond)' in October 2004 to create a new avenue for investment by Islamic banks and financial institutions in the country. This could also be used as an approved instrument for the purpose of maintaining the statutory liquidity requirement. Investment in the bond is also open to individuals and non-resident Bangladeshis.
ISLAMIC FUNDS IN BANGLADESH: A recent development in the equity market was the introduction of the Alliance S&P ShorT'ah Index Fund in September 2013. This open-end mutual fund is the first Islamic index fund in Bangladesh. Dhaka Stock Exchange (DSE) has introduced Shariah index (DSES) on January 20, 2014 by adopting the index calculation of S&P. The index is serving to attract foreign investors who prefer to invest in Shariah-compliant stocks. In the same year, DSE has already initiated steps to explore and ultimately launch various new tradable products starting with Exchange Traded Funds (ETFs) to be followed in the long term by expansion of current product offering to include convertibles, bonds, Shariah-compliant products including SUKUK, ETFs, REITs (Real Estate Income Trust), etc.
That Sukuk is gaining greater acceptance as a mainstream financing instrument is evident from the increasing number and greater frequency of issuances coming to the market. In 2013, a total of US$119.7 billion of Sukuk issuances were recorded for the primary market, with sovereign Sukuk accounting for 62.3 per cent. Malaysia accounted for 69.0 per cent of total Sukuk issuances, or US$82.6 billion. In 2013, the GCC countries collectively contributed 22.0 per cent of total primary market issuances in the same year.
Following record primary market issuances of US$131.2 billion in 2012, the 2013 performance recorded a decline of 8.77 per cent. In the GCC countries, corporate and government-linked companies raising funds in US dollars made Saudi Arabia and the UAE the largest Sukuk issuers in 2013.
The total asset under management (AuM) of Islamic funds has grown at a steady CAGR of 7.33 per cent from 2007 to 2013, recording US$72.5 billion at end-December 2013. The growth of the sector's AuM in 2013 has been driven largely by net new asset flows into the sector, rather than by the rise in value of existing securities underlying Islamic funds' assets. The total number of Islamic funds stood at 1,049 as on December 20, 2013, with 79 new funds launched in 2013.
Islamic funds are highly concentrated in a few jurisdictions with almost two-thirds of all Islamic fund assets in Saudi Arabia and Malaysia, followed by Ireland, the US and Kuwait.
 OPPORTUNITIES IN BANGLADESH: Islamic banks of Bangladesh are living examples of success in banking sector. Islamic capital market may be second marketplace for Bangladesh and instruments such as Sukuk, Treasury Bills for corporate and governments throughout the world. In January 2014, the Dhaka Stock Exchange disclosed plans to list an Islamic equity index that would track Shariah-compliant stocks. As on October 1, 2013, the combined market capitalisation of listed companies on the Dhaka bourse stood at BDT 2.5 trillion, or US$32.6 billion. This is compared to the US$1 trillion capitalisation of the National Stock Exchange of India, US$394.8 billion of the Stock Exchange of Thailand and US$48.7 billion of the Karachi Stock Exchange. Overall Islamic finance industry in Bangladesh has significant room for growth, particularly in the capital market space. Despite tremendous growth of Islamic banking in the country, a large portion of the population remains unbanked. Thus, the full potential of the budding industry has yet to be unlocked.
 Critical factors are required for the development of an effective ICM in Bangladesh with the following:
1. Government eagerness,
2. Separate units in regulatory framework,
3. Shariah governance framework,
4. Growing awareness among the people about ICM products.
In Bangladesh, a predominantly Muslim country, there is a tremendous possibility for the growth of Islamic capital market. Already, Islamic banks have attained considerable success in the banking sector and Malaysia has achieved a great success in this sector.  
The writer is Senior Officer, Islami Bank Bangladesh Ltd, Chawkbazar Branch, Chittagong.
mnaem7621@gmail.com

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Source: The Financial Express


 

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