2.9
Islamic Capital Markets
Mansur Mannan, Credit Suisse
Introduction
The growth of Islamic finance in its modern form has, by all accounts, been
impressive. This growth was further accelerated at the turn of the century
by developments in the Islamic capital market. Bilateral and syndicated
financing techniques had been developed and extensively used in the 1980’s
and 1990’s, both by the Islamic financial institutions as well as Islamic
windows of conventional financial institutions. Such techniques were
nonetheless limited. Funds successfully mobilized by Islamic financial
institutions were invested in a limited number of financial instruments,
dominated by short-term trade financing. Such instruments mainly included
purchase finance using cost-plus-margin (murabaha), leasing (ijara), financ-
ing and, to a small extent, investment management (mudaraba) and
partnership (musharaka) models. Such status remained fairly static with a
significant portion of Islamic institutions’ assets comprising short-term
commoditymurabaha-based placements. This was partly due to market
conditions, but also lack of liquid assets and other constraints.
By the late 1990s, regulators and industry leaders called for the
introduction of new products and the promotion of financial engineering.
Their main areas of concern were the lack of liquidity, a lack of portfolio and
risk management tools, and the absence of derivative instruments. One of
the impediments to growth was the lack of understanding of the fast
changing landscape of modern financial markets, as well as the intricacies
of rules demanded by the Shari’a.
The task was further complicated by the different schools of Islamic
thought in various parts of the globe. Nevertheless, by the turn of the
century, Islamic financial institutions had realized that the development of
capital markets was essential for their survival and further growth.
Meanwhile, deregulation and liberalization of capital movements in several
countries led to close cooperation between Islamic financial institutions and
conventional financial institutions in order to find solutions for liquidity and
portfolio management. This resulted intwo distinct developments:
- The introduction of equity funds that were compatible with Shari’a; and
- The launch of Islamic asset-backed securities, more commonly known
assukuk.
