2.10
Secondary Markets in
Islamic Finance
Majid Dawood, Yasaar Ltd
Introduction
Secondary markets, in the financial sense, are defined as enabling the
trading of securities that have been issued already to the market by means
of an initial private or public offering, or to put it in the vernacular a market
for the trading of "used goods". Once issued and listed on a stock exchange,
goods, stocks or other financial instruments/products can be traded by
investors through bids and offers provided by the market-makers in those
securities. A requirement for the secondary market is that it be highly
liquid. The secondary market is extremely important for liquidity and
efficiency purposes in modern capital markets. The need to be able to trade
issued securities has been the driver behind the emergence of stock
exchanges.
Islamic finance secondary markets
Where are the secondary markets in Islamic finance? We now have a
securitization market worth an estimated $2 trillion+ in the overall Islamic
finance sector. The sector is very young and needs to have critical mass. The
current liquidity being generated by the oil price boom is pushing the
recipient nations in the Middle East to develop their infrastructure, industry
and services to create sustainable environments. These developments are
being leveraged to ensure larger and more encompassing projects, which
will in turn help to create a critical mass of financial issues and instruments
to support development.
However, a potential issue will always be that there will be wealth, but
the populations will be so small that their industrial base will need to be
export-oriented. There were some Islamic equity funds in the early days,
and these were managed funds and therefore had the element of a secondary
market.
As debt is not tradable under Shari’a, this restricts the development of a
secondary market in tradable debt, which in turn mitigates the potential for
