Discussion and Recommendation

How the Islamic fi nancial instruments contribute to capital market?

Financial instruments play a good role in Islamic capital market. Islamic financial
instruments are traded by don't conflict with the Shariah principles because it plays a very
important role in generating process and complimenting and broadening the Islamic banking.
Islamic capital market transactions are required to be dispensed in ways during which don't
conflict with the Shariah that the market is free from activities prohibited by Islam like excess
encompassing Riba, Maysir, and Gharar. Therefore, there's a requirement to review this
practice prevailing within the financial market to spot which of those practices needed to be
reformed from an Islamic point of view and which of them is additionally acceptable. The
main focus of the Islamic capital market is to make sure the equitable allocation of capital to
the sectors which could yield the sole of returns to the owners of capital as well make sure
sufficient investments opportunities to draw in surplus funds in accordance with the owners'
preferences in terms of the extent of risk involvement, rate of return further due to the
quantity of investment.

Equity-based security is an example of Islamic financial instruments where it does not

guarantee any return and does not include forbidden businesses that can constitute
investments to the Islamic capital market. Whereas debt-based securities that carry a difficult
and fast return until maturity, like debentures, bonds, preferred stocks and certificates of
indebtedness, are inconsistent with Islamic principles and it'd, therefore, be necessary for
innovative instruments to be designed to interchange them. Preferred stocks can match within
the Islamic framework by turning them into redeemable equities with a part of participation
in both earnings and also the proceeds of liquidation. However, debt and preferred stocks
would get replaced by Islamic instruments. In fact, Islamic financial instruments have
particular characteristics to befits the Shariah rules that they need to represent a share in
equity, real assets, usufruct or a mixture of some or all of those, they need to not earn money
on debt and their holders must be the owners of whatever rights these instruments represent
and bearers of all related risks.
The tradability of an instrument regarding debt must in accordance with Shariah rules and it
mustn't be allowed to earn any return. Furthermore, Mudarabah or Musharakah are supported
by the issuance of Islamic financial instruments. this where the issuers should keep separate
accounts for every specific project because the prospectus should include full disclosure of
the character of the activities, contractual relationships and obligations between the parties
involved and ratio of portion and also the profit and loss accounts must be declared at the
date mentioned within the prospectus and balance sheets; the Principle and expected return
on investment can't be guaranteed.as an example Ijarah is the fixed-return contract approved
by the Shariah as it's possible to lift funds by this suggests through the stock exchange.
Lease-stocks will give ownership to the stockholders of the leased equipment, from which
they'll receive a known flow of rent. this may be often allowed in Shariah since they'll bear
the danger of the eventual value being much under was estimated.

Furthermore, since the entire capital resources, both short-term and long-term, within the
Islamic system are equity-based and not debt-based there's a requirement for a never-ending
pricing mechanism to the Islamic economic system to forestall it from major shocks and
crashes. For this example, three markets should be constantly reviewed that are speculation,
information disclosure standards and also the regulations guiding operations and trading
practices.

Speculation will bring effects like wild swings within the market through misallocation of
resources that lead to losses and gains fully unrelated to real economic effects. Such results
are rather just like the results of gambling, involving the transfer of resources among the
participants but adding nothing to the initial stock of resources. The adequate flow of public
information is what protects investors by ensuring that significant changes in shareholding
aren't the results of some people having information not available to the last word public. and
also the regulations guiding operations and trading practices require restrictions to make sure
an adequate flow of knowledge about the business whose securities are being traded and to
manage the trading practices within the market.
Discussion and Recommendation
How is Islamic Financial Instruments in capital markets different from conventional?

Apart from the basic principles of Islamic financial instruments discussed, there are some sets
of things that difference between conventional financial instruments from Islamic financial
instruments. These areas of differences include.

Nature of assets backing an instrument

Conventional financial instruments are mere paper assets. the price of such assets is
supported by their intrinsic worth typically determined by the supply of data, issuers
performance and ratings, targeted returns and also the extent of trade-ability of a given
instrument. Besides, the conventional financial instrument deal principally on intangible
assets, that are not backed by tangible assets or commodities and different assets of physical
existence and substance. Below this condition, the worth of the instrument is usually a
perform of the longer-term economic edges it attracts. Islamic financial instruments, on the
other hand, don't believe cash as an instrument of trade or commodity. As such, it doesn't
have intrinsic worth, however a mere medium of exchange. Therefore, the utilization of
money as the commodity is prohibited by shariah particularly wherever build gains while not
effort or any sort of risk. Islamic financial instruments are essentially financial instruments
primarily supported by assets of varied forms particularly the tangible ones.

Relationship between investors and issuers

Conventional financial instruments consider the link subsisting between instruments’

investors and issuers as that of borrowers and lenders. as an example, if an institution
problem a ten -year bond through the capital market, he becomes the recipient. As an investor
who signed to and acquire the bond issued is seen because of the lenders. Islamic financial
instruments, on the other hand, check abreast of the link between investors and issuers as a
mutually beneficial relationship a la mode of either venture, partnership or a client and
merchant simply to say few. A case in purpose here is in Musharakah financing, the financier
and his shopper are technically deemed as partners whereas in Murabaha, the parties square
measure seen as a merchant (financier) and therefore the buyer (client) sort of arrangement as
against the loaner and recipient views in conventional finance.
 Risk-taking

Risk-taking could also be a serious underpinning distinction between the traditional financial
instruments and Islamic financial instruments. Below the traditional financial instruments,
financiers or investors don't share the associated risk of the investment. This risk aversion is
premised on the idea that a recipient should end up returns to cover for the principal and
interests with no contemplation of risk to his investment. the quality arrangement entirely
transfers the danger to the consumer or recipient. Islamic financial instruments but is formed
primarily of risk-sharing arrangements. The instruments are designed with fairness having in
mind that whoever is entitled to returns, he/she should equally partake in sharing the danger
regarding such returns.

Existence of divine regulations

Islamic financial instruments are managed by divine laws (Shariah) that taken from the
Qur’an, Hadeeths, and Ijma (Consensus of Scholars). Coherent policies and laws square
measure typically drawn from divine laws as mentioned. Unfair business dealings like
exaggerated adverts and promo, cheating

in product and costs, abnormal profiting, hoarding, non-public monopoly, and deceits are
outlawed by shariah. However, these restrictions derived from the divine books square
measure non-existent below the traditional Islamic instruments

The extent of contractual conditions

Apart from the elemental components of a sound contract is contained within the common
English laws like offer, acceptance and the payment of concerns, etc. the traditional financial
instruments have restricted agreement rules and principles. Islamic financial Instruments
embody many elementary principles as enshrined by shariah. These principles embody
provisions that Islamic financial Instruments should be from Gharar (i.e., uncertainty).
Transactions conditioned around the prevalence or non-occurrence of unsure events is
prohibited. Such uncertainties conjointly cowl transactions beclouded with huge ambiguity
particularly people that could probably cause disputes and alter of terms square measure
thought-about revocable.
Discussion and Recommendation
What are the problems faced in the application of Islamic Financial Instruments in capital
markets?

Thought the Islamic capital market is growing fast, it remains a distinct segment market with
several practical and regulatory issues.in order to develop the Islamic financial market, the
Islamic financial instruments play a crucial role to develop it. There are few issues facing by
the Islamic financial instruments in capitals markets are:

Lack of standardization and the presence of various

Shariah committees (SC) standardization is very challenging but crucial issues in accounting
and regulation. Currently, various jurisdictions have their individual monitoring shariah
committees and regulatory approaches. since there are only a few collaborative efforts on the
regulatory front at the international level, there is no uniform or standard approach for the
monitoring and enforcement process. as evidence within the determination of the Sukuk is
going to be differently approached by different parties also.

Need for liquidity and risk management

Islamic financial instruments are more vulnerable to asset side risks on their balance sheets
compared with conventional financial instruments.in the conventional part, the loans provide
within the profit or loss agreements which more vulnerable in the market also as a credit risk
because the lender would be ready to recover the loan if the borrower makes take advantage
of their business. Furthermore, shariah law restricted the usage of money collaterals which let
the lenders be at much risky area compared with fixed interest loans. Islamic financial
instruments exposed to the main risk of asset-liability mismatch. this explain within the
situation within the lack of a mature Islamic interbank market, Islamic financial instrument
face difficulty in managing the day to day cash also the short term liquidity needs.
 The difference in shariah interpretation

Shariah plays a crucial role in ensuring the right interpretation of Islamic principles.

Legal complexities arise when there's suits the commercial aspect. However, due to the
varied thought, interpretation, and understanding of the law nay different between shariah
scholars. some might acceptable, some couldn't.

Inadequate regulatory framework

The rapid development and innovation in Islamic financial instruments has not to match with
the fixing of the adequate and uniform regulatory framework. The current regulatory
framework may have a difference from the part of the financial instruments when across the
various countries. while the regulatory framework for conventional instruments could also be
adapted for Islamic financial instruments, the certain transactions may require more specific
guidelines to make sure shariah compliance and regulation.

Recommendations

Lack of standardization is an obstacle to the future growth of the sukuk industry.

Thus, we proposed each country to have a central Shariah Board to offer specific guidelines
about which financial products are Shariah-compliant to investors. Countries should
standardize their own jurisdiction system as the first step to overcome this obstacle. Next, the
establishment of a unified international shariah board will guide the sukuk market. The new
shariah board should have the same function as the current board. Instead, the purpose of the
new organization is to organize the activities of the Shariah Councils of Countries and the
Financial Institutions. The new Board shall develop Shariah norms, update existing norms
and provide effective Shariah oversight and governance in cooperation with the countries
concerned. In this way, the unified and foreign Shariah board will introduce consistency in
the sukuk sector, minimize uncertainty, speed up the method, raise the trust of investors and
build a broader global investor base.

On top of that, although some international regulatory bodies have issued Sukuk,
they are not unified. For this purpose, standards issued by the new unified and international
shariah boards should be bind globally. On the other hand, some mechanism needs to be
worked out to get the Islamic banks and financial institutions to abide by the standardized
products, preferably by the force of law; but if not feasible, then by blacklisting the non-
abiding banks. By this way, the standardization of sukuk market can be achieved.

Next, it is also advised to invent a modern sukuk system that can be exchanged on the
secondary market in compliance with the Shariah. Secondary markets for sukuk should be
developed and integrated around the globe. This will help to overcome the undeveloped
sukuk secondary market. It is also best recommended for the research and development for
the further growth of the Sukuk industries to be done. Cooperation between regulators,
business leaders, academics and investors may be quite necessary. Incentives or bonuses may
also be provided to the creative Sukuk system. Besides, the Ethics and fundamental values
are part and parcel of Islamic culture. Each should personally understand and perform his or
her duties and obligations. Thus, these ethical and moral features should also be built in the
Sukuk market.

Moreover, in order to generate expertise in Islamic capital market such as Sukuk,

Shariah Compliant Securities (I-stocks), Islamic Unit Trust Funds, the Shariah specialized
credit rating, risk management consultancy firms and education and training institutions
should be established. We should develop a platform on the Islamic money market as a
source of information on domestic Islamic financial instruments to help improve the capital
markets and to promote investment decisions and protect public trust in their business. The
website seeks to efficiently address the needs of traders, financiers, statisticians, analysts and
potential buyers as well as to raise consumer knowledge domestic and international as well.
The website will continue to be connected to other markets and act as a forum for the sharing
of information and ideas outside our borders.

Furthermore, the presence of a well-developed Islamic capital market is therefore vital

in providing financial users with an efficient and cost-effective means of medium and long-
term financing. This will also provide buyers and savers with a broader variety of financial
instruments to match their individual returns and risk profiles and provide for a better
diversification of risks in the financial system. One of the linkages in this market is asset
securitisation. Mortgage financing is an example of where the asset liability mismatch can be
addressed. Thus, this will greatly increase the liquidity and efficiency of financial institutions
' reserves, while at the same time contributing to the growth of the stock market and to the
secondary exchange of instruments through the issuing of private debt securities backed by
mortgages. With the implementation of securitisation, the reach of the securitisation activities
will grow and broaden.

It is also recognized that effective corporate governance enhances strong supervision

and oversight. This helps to preserve investor trust and to affirm openness and responsibility
that is inherent in Islamic finance. Its focus is on value-oriented, and upholding equity and
justice for all financial institution stakeholders. The process needs accountability and
disclosure. While the comprehensive and timely availability of financial reports can improve
business efficiency, market players ' capacity to evaluate and correctly perceive the reports
still needs to be complemented.

REFERENCES

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importance-of-islamic-capital-market-in-malaysia
3) Haider, J., & Azhar, M. (2010). ISLAMIC CAPITAL MARKET. Sukuk and Its Risk
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