204 AN INTRODUCTION TO ISLAMIC FINANCE
the listing of Islamic securities issued by foreign member countries on their
domestic exchanges.
Incentives to Promote Capital Markets
For the further development of Islamic capital markets, policymakers should
provide incentives for businesses and fi nancial institutions to engage in Islamic
instruments. These incentives can come in the form of tax breaks for the issu-
ers and underwriters of Islamic securities. These could include, for example,
a tax deduction for research and product - development expenses or for pay-
ments made on sukuk similar to the tax deduction of interest payments in the
conventional system.
In the area of equity markets, policymakers should try to attract retail
investors to participate in Shari’ah - compliant stocks. With the rapid devel-
opment of Internet banking, policymakers can attract retail investors from
different geographical areas, provided that the markets are liberalized and
there are no unnecessary restrictions on foreign investors.
Developing Supporting Institutions
Today’s capital markets are supported by many institutions that perform
critical functions for their smooth operation. These institutions include rat-
ing agencies, standard - setting agencies and industry associations. Some prog-
ress has been made in this respect with the establishment of institutions such
as the International Islamic Financial Market (IIFM) and the International
Islamic Rating Agency (IIRA). The IIFM acts as an industry association to
promote cooperation among market players and with conventional fi nan-
cial institutions to further enhance the growth of new Islamic products and
fi nancial instruments. The IIRA was established to rate, evaluate and provide
independent assessments and opinions on the likelihood of future losses by
Islamic fi nancial institutions as well as their products and services. Both of
these institutions are based in Bahrain and focus on that market. However,
similar institutions could and should be established in other Muslim coun-
tries to support local markets.
Financial Engineering
Financial engineering has revolutionized the conventional capital markets.
Sukuk are a good example of fi nancial engineering and the further applica-
tion of such techniques in the area of development of money and intra -
bank markets should be encouraged. Money markets provide liquidity in
the short term and support capital markets to focus on long - term capital
needs. Another strong candidate for further growth is the development of
mortgage - backed and asset - backed securities, where a pool of homogeneous
assets is securitized.