Issues and Challenges 375
Liquidity
Financial market effi ciency and resilience are determined by the depth (indi-
cated by the volume and frequency of transactions) and breadth (measured
by the array of fi nancial instruments and services available) of the market.
Islamic fi nancial markets are still small when compared to conventional
markets. A large share of Islamic fi nancial markets is dominated by com-
mercial banking activities, but even this is still less than one percent of total
conventional banking. Although there is growth in other areas of fi nance,
such as capital markets and insurance, these are also very small. For exam-
ple, the total size of outstanding sukuk as of 2007 was US$140 billon, which
was only 0.47 percent of a total outstanding debt of US$29,728 billion in
US markets.^5
Integration with Global Financial Landscape
Increasing globalization has spread Islamic fi nance to many different
geographical locations where the infrastructure does not support Islamic
fi nance - friendly institutions. This poses a problem for policymakers and
regulators and can create an obstacle to the growth of Islamic fi nance. For
Islamic fi nance to integrate well with the conventional system there is a need
to develop international institutions and standard - setting agencies that can
provide the necessary support to local authorities and develop procedures
and standards which can be adopted with ease.
Liquidity Risk and Lender of Last Resort
Several studies have highlighted the issue of liquidity risk associated with
Islamic fi nancial instruments and the resulting exposure to Islamic banks.^6
In addition, the lack of a lender - of - last - resort facility based on Islamic
instruments further complicates the problem of liquidity risk. Although this
facility is usually available to Islamic banks, such arrangements are based
on interest — a prohibited element. For a fully functional fi nancial system,
a lender of last resort that complies with Islamic Law is another essential
requirement. Very limited work has been done in this area and further
research is required.^7
Development of Benchmarks
The practice of measuring the performance of an asset by comparing its
return and risk to a well - defi ned benchmark is now standard in a market -
centered fi nancial system. Markets are good at offering an effi cient, meas-
urable, and consistent benchmark for different asset classes and securities.
The dearth of transparent benchmarks that can be used to compare risk -
adjusted returns complicates the task of evaluating the effi ciency of fi nancial
institutions. Such benchmarks are valuable tools for measuring the relative