Secondary Markets in Islamic Finance 121
they are asked if they have a Shari’a version of their product as they would
prefer to invest in a Shari’a-compliant manner.
Innovation
Demands by Muslim investors are pushing theinternational financial
institutions to be more creative and work closely with lawyers and Shari’a
scholars to develop Shari’a-compliant products that will be acceptable in
most jurisdictions. More and more financial institutions are creating Shari’a
boards that cover multi-regions and schools of Islamic jurisprudence to
enable the product to be acceptable across many of the jurisdictions.
There have been developments in capital-protected products, such as the
replication of short sale benefits to motor the infant Islamic hedge fund
industry through prime brokerage avenues, "variations of a theme" using
arbouns,wa’ad, etc. A lot of these developments produce tangent products
and innovative means to achieve conventional equivalent Shari’a-compliant
offerings.
Convertiblesukukhave been particularly attractive for investors, and the
ability to convert to the issuer’s equity has encouraged trading in the
secondary market due to performance of that underlying equity. There has
also been the development of Shari’a-compliant repurchase agreements and
the presence of a sustainable and robust repo-market will enable holders of
sukuksto free-up capital from their balance sheets for periods of time as
may be necessary to take advantage of opportunities as they arise or to meet
regulatory requirements. This would allow smaller investors to take
exposure to thesukukmarket at prevailingmarket rates.
Market-makers and exchanges
As with any secondary market, there is a need for a developed and efficient
market-making process or exchange. Exchanges such as the Dubai Interna-
tional Financial Exchange (DIFX) are making efforts to provide electronic
exchange services for Islamic products by means of listingsukuks, etc.
Smaller market-makers are active in tradingsukuksin London, Hong Kong,
etc. The issue for them is the dearth of sellers due to the number of listed
sukuksand lack of a depth of products and volumes. As the number of
sukuks, exchange-traded funds, and other products get launched and listed,
the market will achieve critical mass for the trading of these issues and to
better manage the liquidity in the market. Presently, most issues are held
to maturity due to the shortage of alternative opportunities to invest and
get a return on that investment, while the pool of liquidity is ever increasing.
Among the secondary market-makers, Barclays Capital apparently trades
sukukdaily to the amount of $20 million, and Dubai Islamic Bank reportedly
trades between $100-250 million worth ofsukukon a monthly basis. It was
