170 AN INTRODUCTION TO ISLAMIC FINANCE
and its benefi ts. Although this practice is conservative in its nature as assets
are collateralized, it has associated costs from the additional exposure to
credit and operational risk. This limited set of asset choices is a major
impediment to the further growth of the Islamic fi nancial services industry.
As mentioned earlier, Islamic fi nancial institutions operate on a limited
set of short - term traditional instruments and there is a shortage of products
for medium - to long - term maturities. One reason for these shortcomings is
the lack of markets in which banks can sell, trade, and negotiate their fi nan-
cial assets. There are no avenues for securitizing dormant assets and tak-
ing them off the balance sheet. In other words, the secondary markets lack
depth and breadth. An effective portfolio - management strategy cannot be
implemented in the absence of liquid markets, as opportunities for diversi-
fi cation become limited. Since the needs of the market for liquidity and risk
and portfolio management are not being met, a serious effect of this under-
development is that the system is not functioning at its full potential. There
is a growing realization that sustainable long - term growth largely depends
on having well - functioning secondary markets and on the introduction of
liquidity - enhancing and risk-sharing products.
Limited Scope
In the absence of debt markets, the underdevelopment of equities markets
and the lack of derivatives markets, the role of the fi nancial intermediary
providing Islamic fi nancial services becomes critical. The fi nancial interme-
diary not only becomes the main source of capital and risk mitigation, but is
also expected to undertake other activities with a wider scope. The changing
global fi nancial landscape expects Islamic banks to go beyond their tradi-
tional core commercial banking role and develop other areas dealing with
securities, risk management, and insurance businesses, which are currently
either lacking or are on a limited scale.
The distinction between traditional commercial banking and investment
banking is becoming blurred and there is a global trend of mixing fi nancial
services with non - banking services in an effi cient fashion. Although this
trend is prevalent in major industrial economies, it has not been embraced
by many of emerging markets where Islamic fi nance is practiced. For exam-
ple, a recent study, which ranked several countries in the Middle East region
(where Islamic fi nance is dominant) according to their level of fi nancial
development, fi nds that throughout the region countries fared poorly on
indicators for a strong institutional environment and for the development
of the non - bank fi nancial sector.^3
Limited Maturity Structure
The over - dependence of Islamic banks on trade and commodity fi nancing
instruments has limited their choice of maturity structure, since a major
portion of such fi nancing is of short - term maturity. Whereas the theoretical