Week 2: Overview of Advanced Islamic Instruments and Markets > Overview and Introduction > Unit
- This is an overview of advanced Islamic finance instruments and markets.
- This is an overview on the Sukuk, which will have a definition of investment Sukuk and an idea about the Sukuk in Islamic financial markets.
- Second, trading and stockbroking in Islamic financial markets.
- We will end up talking about derivatives, derivatives in Islamic finance in general and the major issues with the derivatives products.
- This is a permanent product in Islamic banking and financing generally.
- The Islamic financial market functions according to the Shari’ah rules and products.
- The Islamic inter-bank market functions on Mudarabah, Wakalah and Murabahah principles.
- Second, Istisnaka based forward market, and third, Ju’alah based forward market.
- First, starting by Sukuk, the concept and types of Sukuk that can be issued, how Sukuk may be priced in Islamic markets, and the types of markets in which it may be used.
- The Islamic financial markets, namely types of financial instruments that can be traded in Islamic financial markets, rules for trading, how the Islamic inter-bank money market works, the types of Islamic forward markets, the Islamic foreign exchange market, nature and condition.
- Nature of derivatives and Islamic finance rules, challenges and controversies about the derivatives.
Week 2: Overview of Advanced Islamic Instruments and Markets > Investment Sukuk > Unit
- Like for Like, equal for equal, payment being made on the spot.
- If these pieces differ, sell as you wish, provided that payment is made on the spot.
- The instruments representing different categories are subject to the rules relating to the dominant category.
- If cash and debt dominate, then bai’ al-Sarf applies.
- If real physical assets and usufruct dominate, trading is based on the market price.
Week 2: Overview of Advanced Islamic Instruments and Markets > Islamic Stockbroking Services > Unit
- Actually, Islamic and conventional stockbroking firms function within the same institutional and regulatory framework, except that the activities of Islamic services have to comply with Shari’ah principles.
- A few conventional stockbroking companies are offering Islamic stockbroking through Islamic windows.
- The accounts of Islamic stockbroking services in these windows are separated from the firms’ conventional stockbroking operations.
- Number four, providing secure Internet trading, SMS, and mobile GPRS trading and automated phone trading, arranging dedicated call centers for 1-to-1 services, and offering national or international share services and multi-channel services.
- The bank provides up-to-date stock quotations, information about market and industry prospects, and company specific information.
- A company’s shares reflect the holders proportionate ownership in the assets of the company, which can be sold for profit.
- The seller must first obtain the shares with all the rights and obligation before selling them to his client.
Week 2: Overview of Advanced Islamic Instruments and Markets > Islamic Inter-Bank Money Market (IIMM) > Unit
- The Islamic money market involves inter-bank trading of Islamic financial instruments, and mudarabah inter-bank investments.
- In mudarabah inter-bank investment, a deficient Islamic bank known as investee, can obtain investment from a surplus Islamic bank known as investor, based on the mudarabah principle.
- The rate of return depends on the rate of gross profit prior to the distribution for investments of one year, of the investee bank.
- Islamic banks can engage in trading of ijarah-based instruments for liquidity management, but adhering to the Shari’ah rules.
Week 2: Overview of Advanced Islamic Instruments and Markets > Islamic Forward Markets > Unit
- First, Salam-based Forward Markets for products and commodities possessing regular market.
- Third, Ju’alah-based Forward Market for services-based activities.
- What’s the Salam originality? There are few restrictions for the Salam-based Forward Market from the point of view of future trading.
- Second, unlike the contemporary future markets, it is forbidden to resell a Salam commodity before it is received.
- Unlike the contemporary future markets again, Salam contracts require advanced payments.
- An Istisna’a contract can be made only for special commodities that are produced as per the defined specifications.
- A Ju’alah contract is applicable only to services and not to physical goods.
- What about the price of the contract? This will be decided based on competitive bets and offers made by the different traders.
- Let’s have a comparison between Islamic and conventional contracts.
- For an Islamic future exchange, a bidding to purchase means commitment towards advanced payment.
- Whereas in conventional future markets as you know, new prices can be offered at any point of time.
- For a significant future market, particularly for resource mobilization, a long-term Istisna’a-based future contract will suffice.
- Prices may fluctuate very often over short term in Salam-based Future Markets.
- This makes the Istisna’a-based Future Markets useful for small savers.
- Now, what about Islamic Foreign Exchange Markets? The Islamic financial institutions can engage in direct placement or investment in Shari’ah-compliant foreign exchange denominated currencies or securities, such as trust certificates issued by Islamic Development Bank or any other Sukuks.
- Foreign exchange markets are based on the principles and rules set by the Islamic Shari’ah.
- What are the conditions of a forward cover? First, foreign currency is required for general trade or payment activities, not for speculation.
Week 2: Overview of Advanced Islamic Instruments and Markets > Derivatives and Major Issues in Islamic Finance > Unit
- Now, what about the major issues with derivatives? The diversity of hedging products are supposed to first, protect clients against market volatility, and second, to provide avenues for risk management.
- Whereas volatility is actually caused when derivatives themselves are traded and the clients have not sold anything.
- Buffett, in 2003, remarked that derivatives are a financial weapon of mass destruction due to acquired pricing and accounting policies.
- The microeconomic arguments for derivatives are unconvincing according to him.
- Then new securities are created and categorized in three level of risk at least.
- When any company in the pool defaults, equity tranche suffers the initial loss, but if equity tranche fails to bear the losses, we move to mezzanine tranche which will suffer.
- The third and the most barricaded level, senior tranche is safe until the collective pool suffers major losses.
- In the past, major losses have ruined the equity and mezzanine tranches of many CDOs.