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CHAPTER – 1

Introduction

The Islamic finance industry is now four decade old and has developed rapidly. In

the past few years, overall market growth has been estimated at between 15-20 percent

annually. Islamic Finance has experienced rapid growth in recent years, showing significant

innovation and sophistication, and producing a broad range of investment products which

are not limited to the complete replication of conventional fixed-income instruments,

derivatives and fund structures. Islamic Finance represents an elemental departure from

traditional interest-based and speculative practices, relying instead on real economic

transactions, such as trade, investment based on profit sharing, and other responsibilities

ways of doing business, and aims to incorporate Islamic principles, such as social justice,

ecology and kindness, to create investment products and financial markets which are both

ethical and sustainable. Islamic capital markets, and Islamic finance in general, is

experiencing global rapid growth and is currently receiving more consideration also by non-

Islamic investors. Islamic Finance is based on the prohibition of interest (Riba), excessive

uncertainty (Gharar) and gambling (Maysir or Qimar). From these foundations, conventional

financial products, such as interest-bearing instruments, options, forwards, futures, and

insurances, as well as conventional practices like short-selling and leveraging, are not

compliant with Islamic law (Shariah). Nevertheless, the Islamic finance industry has

undertaken considerable efforts to create products and solutions of the same value, in

many instances by replicating conventional structures in a Shariah-compliant manner. This

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has led to discussions between scholars and practitioners, as some scholars regard specific

replication techniques merely as ploys and ruses. While no definite answer can be given yet

concerning the question of Shariah-compliance for every single instrument, some trends are

emerging in this dynamic market. The Islamic financial instruments such as Sukuk, Shariah-

complaint funds and, Islamic derivative products are essential for asset management and

risk management in any Islamic context, and provide answers to many of the investors'

needs. The Shariah not only prohibits Riba, Maysir and Gharar in financial contractual

agreements and transactions. The Islamic alternative to Riba is trade and commerce. The

essence of trade and commerce is profit creation that implicates risk-taking and value-

addition. Doing so promotes fairness and equitable transactions and thus putting ethics and

morality into the limelight of corporate business today.

Although, some say that current practices unintentionally seem to out focus the real

Islamic agenda for wealth creation and management. Islamic financial systems nowadays is

not yet close enough to those noble ideals. In several cases, the basic rules, such as the

prohibition of Riba, have been circumvented, and pseudo-Islamic financial products were

created, which were actually mere imitations of conventional financial products. Most

existing Islamic financial institutions are Shariah-compliant in form, but few of them have

aimed to achieve the higher objectives of Shariah, i.e. to add explicit “ethical” objectives

and features to their financial products. However, Islamic finance is the only financial

system in the world today that is based on the teachings of a major religion, and it proves to

be increasingly attractive for secular Muslims and non-Muslims as products created

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according to Islamic principles have shown a low correlation to other market segments and

are relatively independent even from market turbulences like the subprime crisis.

All this makes Islamic finance a topic of truly global interest and relevance, as there

is the potential for introducing a truly financial system which is both ethical and stable at

the same time.

Hypotheses:

I. Although Islamic financial industry was started 40 year ago. However, Islamic

financial markets as an important part of the industry have started very

recent. Most of developments of Islamic Financial markets have occurred

during last decade.

II. Islamic financial markets have grown significantly in last decade. The growth

of these markets are not confining only within Islamic states where the

majority of the population want to get rid of Riba based finance but in Non-

Muslim states as well.

III. The structures of Islamic financial markets products are various. However, all

of them have been developed on the principle of Islamic finance which

consist of profit-lost sharing, sale, and lease principle.

IV. West Asian region is an important region as it is a source of capital surplus

and demand for Islamic financial markets products.

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Objective:

The following are the objectives of this study

a) To study the performance of Islamic financial markets

b) To study the nature of Islamic financial instruments

c) To explore available type of Islamic financial markets instruments

d) To study the performance of Sukuk market in financial markets

e) To study the performance of Shariah-complaint stock in financial markets

f) To study the performance of Shariah-complaint funds in financial markets

g) To study the trend of derivative finance in Islamic financial markets

Significance of the study:

Islamic financial market is one of the important segments of Islamic financial

industry which contains high market growth rate and bright future potential. Moreover

after 2008 financial crisis this market has received more and more attention from investors

both Muslims and Non-Muslims investors as this market has been less affected from the

crisis.

The proposed study would attempt to study the performance of Islamic financial

markets in global context, try to provide the picture of trend and magnitude of the markets

growth. The study would attempt of explore and depict structure of Islamic financial

markets’ instrument prevalent in this fast growing segment of Islamic financial industry. In

Sukuk also known as Islamic bond the study would categorize the common structure of

Sukuk and depict the development of the markets both international and domestic markets.

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In Shariah-compliant equity markets, this study would discuss general conditions of Islamic

stock screen criteria and elaborate in detail for some important Islamic stock index. The

study would also attempt to study another component of Islamic financial markets such as

Islamic funds and derivative instrument as well.

Methodology:

The study is essentially based on secondary sources of data and information which is

collected from different sources and publications. Various yearly and monthly publications

providing information relative to the Islamic financial markets and in instruments such as

Sukuk markets, Shariah - complaint stock, and Shariah - complaint derivative product.

Simple, Statistical figure, chart relevant for the study of this topic will be utilized to analyze

the subject.

Literature review:

Sheikh Ghazali Sheikh Abod, Syed Omar Syed Agil, and Aidit Hj. Ghazali (editors)1,

“An Introduction to Islamic Finance” is a collection of works previously published either as

chapters of books, seminar papers or journal articles. The collection has been organized in

seventeen chapters classified into five thematic sections: The financial environment, riba

interest, investment and resource allocation, forms of business organizations and

modes of financing, and financial markets. In Financial chapter, the authors, Metwally,

Zaman, and Mohsin, point out that Arbitrage, hedging and speculation are used as survival

1 Sheikh Ghazali Sheikh Abod, Syed Omar Syed Agil, and Aidit Hj. Ghazali (editors), An Introduction to Islamic Finance,Quill Publishers, Kuala Lumpur, 1992,

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strategies by both financial and non-financial companies. This has given rise to the often un-

understood hedging instruments known as derivatives. Efficiency of the markets for real

as well as financial assets is being greatly affected by these hedging instruments. They

suggest that these methods of the conventional financial markets should not be

acceptable in Islamic economics. But, neither of the authors provide any alternatives to

these strategic methods.

Muhammad Anwar2, “An Islamic Perspective on Capital Markets and Islamic

Securities in Malaysia” is to discuss the "Islamicity" of the main activities in the conventional

capital markets and the Malaysian "Islamic" capital market instruments in the light of

Islamic principles. The study discusses the following topics. An Islamic criteria for portfolio

management through capital market activities. The "Islamicity" of conventional capital

market (with an emphasis on secondary markets) operations and the "Islamic" capital

market in Malaysia are discussed. Additional recommendations towards the Islamisation of

capital markets are made.

Abdullah Saeed3, in ”Islamic Banking and Interest: A Study of the Prohibition of Riba

and Its Contemporary Interpretation”, examines the traditional interpretation of "Riba”

(translated as usury of interest) and the attempts of modern Islamic banks to put that

interpretation into practice. He examines the prohibition and interpretation of "Riba” in

Islam, as well as the controversies surrounding it and examines the alternatives to interest-

2 Muhammad Anwar, An Islamic Perspective on Capital Markets and "Islamic" Securities in Malaysia, The Pakistan Development Review, Volume: 34 (1995), Issue: 4 pp. 865-878. 3 Abdullah Saeed , Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation, Brill, The Netherland, 1996

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based financing utilised in Islamic banking and the problems associated with such

alternatives with particular focus on Mudaraba, Musharaka and Marabaha. He questions

the legalistic approach to the interpretation of "Riba” and argues for a moral understanding

of the issue in the light of the authoritative texts of Islam and the lessons learnt from the

Islamic banking experiment.

Masudul Alam Choudhury4 “Money in Islam: A Study in Islamic Political Economy”

tries to look at how money has operated in Islamic society and at how Islamic theoretical

framework have influenced perceptions of money. He draws upon historical, data and

policy analysis to present a comparative study of monetary theories, including recent

treatment of money by Islamic economists. Discussion covers the nature of joint venture,

stock markets, banks and financial intermediaries, price stability, and international trade. At

a time when various theories of money are contending against each other for a better

understanding of the relationship between money and global economic activity, this work

sheds pioneering light in this area.

Bacha, Obiyathulla I.5, “Derivative Instruments and Islamic Finance: Some Thoughts

for a Reconsideration” This paper examines contemporary derivative instruments and the

Islamic viewpoint of these new instruments. The validity and permissibility of these

instruments appears to vary by scholar. Even where Islamic scholars have found them to be

objectionable, their reasons for objection differs. Much of the work by Islamic scholars has

been of a highly juridical nature. They examine derivatives within narrow confines of

4 Masudul Alam Choudhury “Money in Islam: A Study in Islamic Political Economy, Routledge, London, 1997 5 Bacha, Obiyathulla I. , “Derivative Instruments and Islamic Finance: Some Thoughts for a Reconsideration”, International Journal of Islamic Financial Services 1.1(1999) pp. 9-25

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contractual arrangements and thereby miss the broader picture of why instruments like

futures and options are needed in modern business environments. The paper analyzes

forwards, futures and options, examines the evolution of these instruments, their unique

benefits and makes a case for why they are needed. Islamic Finance instruments with

derivative like features such as the Bai Salam and Istisna contracts are also examined. Some

of the key concerns that Islamic scholars have regarding derivatives is addressed.

Al-Yousif , Yousif Khalifa6 “Financial Markets: An Islamic Perspective” addresses that

Financial markets are essential for the efficient allocation of resources in developed and

developing countries alike. However, modern financial markets are, in many respects, in

violation of a number of Islamic rules of doing business. So how can Muslims reap the

advantages of financial markets, as intermediaries between savers and investors, without

being in conflict with the basic teachings of their faith? His paper attempts to answer this

question by assessing the operation of modern financial markets from an Islamic

perspective and then by offering a possible Islamic alternative.

Muhammad Anwar7 “Development of Mudarabah Instruments: Understanding Their

Profitability, Securitization And Negotiability Aspects” attempts to examine the

securitization, negotiability and profitability aspects of three types of Mudarabah

instruments; namely, asset-enfaced Mudarabah instruments, currency-enfaced Mudarabah

instruments representing monetary contributions and currency-enfaced Mudarabah

6 Al-Yousif , Yousif Khalifa “Financial Markets: An Islamic Perspective”, International Economics, Volume: 53 (2000),Issue: 3, pp.277-298. 7 Muhammad Anwar, “ Development of Mudarabah Instruments: Understanding Their Profitability, Securitization And Negotiability Aspects”, IIUM Journal of Economics and Management, Volume: 9 (2001),Issue: 2, pp. 165-186.

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instruments representing real assets. This paper begins with a distinction between Riba

(usury) and profit and concludes that an exchange of currency enfaced Mudarabah

instruments in varying amounts entails Riba while an exchange of asset-enfaced Mudarabah

instruments will generate legitimate profits. The current practice is to issue currency-

enfaced Mudarabah instruments but treat them as asset-enfaced Mudarabah instruments.

This position is analyzed and policy implications are drawn for future development of

Mudarabah instruments.

Bacha, Obiyathulla I, Abdullah, Mimi H,8 “Halal Stock Designation and Impact on

Price and Trading Volume” the paper examines the impact of the Malaysian Shariah

Advisory Council’s (SAC) decision on stock eligibility. Specifically, the paper addresses four

questions related to returns and trading volumes of stocks in relation to the SAC’s decision

to add or delete a stock to their list of halal stocks. Overall, the paper suggests that

inclusions experience a positive impact while deletions negative.

Usmani, Muhammad Taqi9, “An introduction to Islamic finance” Justice Usmani of

Pakistan, who chairs several Shariah supervisory boards for Islamic banks, clearly explains

the various modes of financing used by Islamic banks and non-banking financial institutions,

emphasizing the necessary requirements for their acceptability from the Shariah standpoint

and the correct method for their application. He deals with practical problems as they arise

in the course of his presentation, and offers possible solutions in each instance.

8 Bacha, Obiyathulla I, Abdullah, Mimi H, “Halal Stock Designation and Impact on Price and Trading Volume”, The Journal of Accounting, Commerce & Finance – Islamic Perspective 1.5(2001), pp. 66-97 9 Usmani, Muhammad Taqi , An introduction to Islamic finance ,Brill, 2002

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Vasudevan Sundararajan, Luca Errico,10 “Islamic Financial Institutions and Products

in the Global Financial System: Key Issues in Risk Management and Challenges Ahead, Issues

2002-2192”. The paper is including: the provision and use of financial services and products

that conform to Islamic religious principles pose special challenges for the identification,

measurement, monitoring, and control of underlying risks. Effective and efficient risk

management in Islamic financial institutions has assumed particular importance as they

endeavor to cope with the challenges of globalization. This requires the development of not

only a more suitable regulatory framework, but also new financial instruments and

institutional arrangements to provide an enabling operational environment for Islamic

finance. The recent establishment of the Islamic Financial Services Board, facilitated by the

IMF, addresses these needs.

Munawar Iqbal, David T. Llewellyn,11 in “Islamic Banking and Finance: New

Perspectives on Profit Sharing and Risk” They discuss Islamic financial theory and practice,

and focus on the opportunities offered by Islamic finance as an alternative method of

financial intermediation. Key features of profit-sharing (as opposed to debt-based)

contracts are highlighted, and the ways in which they can facilitate improved efficiency and

stability of a financial system are explored. The authors illustrate that in addition to some

200 Islamic banks operating in Muslim as well as non-Muslim countries, some of the biggest

multinational banks are now offering Islamic financial products.

10 Vasudevan Sundararajan , Luca Errico, Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead, Issues 2002-2192, IMF working Paper, 2002 11 Munawar Iqbal, David T. Llewellyn, eds, Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk, Edward Elgar Publishing Inc., Northampton,2002

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Muhammad Akram Khan 12 “Islamic economics and finance: a glossary” is a glossary

book that introduces terms used by Muslim scholars, historians and legal experts. The book

covers terms from Arabic, Urdu, Turkish, Malaysian and English sources, while covering the

Islamic side of terms such as taxation, banking, insurance, accounting and auditing.

Nathif J. Adam, Abdulkader Thomas13, in the book “Islamic Bonds: Your Guide to

Structuring, Issuing and Investing in Sukuk” discuss the nature of sukuk, how they differ

from conventional bonds and the development of the sovereign & corporate sukuk market.

It also covers how to structure sukuk transactions (eligible assets, investment vehicles,

undertakings and credit enhancement). Sovereign sukuk applications in leasing finance,

hedging and risk transference, banking and liquidity management, real estate and REITs

Regulation, and legal and taxation issues.

Clement M. Henry, Rodney Wilson14 in “The politics of Islamic finance”, they take

other aspects of Islamic finance, political factor. They point out effect of political factor as

one of the determinants of Islamic financial development. As the wake of the terrorist

attacks on America the UN Security Council passed a resolution targeting transnational

sources of terrorist funds. The United States and the International Monetary Fund are

encouraging the governments of the Middle East to adopt policies of economic liberalism

and a new type of capitalism, based on Islamic values and beliefs, is emerging. They explore

the political implications of the slow but steady accumulation of Islamic capital. They also

12 Khan, Muhammad Akram, Islamic economics and finance: a glossary, Routledge, New York, 2003. 13 Nathif J. Adam, Abdulkader Thomas, Islamic Bonds: Your Guide to Structuring, Issuing and Investing in Sukuk, Euromoney books, London, 2004 14 Clement M. Henry, Rodney Wilson, The politics of Islamic finance, Edinburgh University Press Ltd, Edinburgh,2004

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analyses the connections between Islamic finance and Islamic political movements in

Middle Eastern and North African countries to show that the commonly-perceived

connection between Islamic finance and money laundering and terrorism is by no means

the complete picture. They point out the various political contexts in which Islamic finance

operates in the Middle East and North Africa and will acquire some understanding of its

political as well as economic constraints. The book is divided into two parts - part one is

thematic and lays the ground for the country-specific case studies in part two (covering the

Sudan, Kuwait, Jordan, Turkey, Tunisia and Egypt). The contributors include political

scientists, economists and historians. Key Features: A major topical issue Written by the

world's leading experts on Islamic Political Economy Explores the connections between

Islamic finance and Islamic political movements Includes country-specific case studies.

Seif I. Tag El-Din15 “The Question Of An Islamic Futures Market” criticizes the

tendency to characterize an Islamic futures market mainly in terms of the Salam contract.

Salam is not only a financing mode, like banking Murabaha, but it is basically a means of

hedging for capital providers not producers. The financing function of Salam implies

‘discounted’ expected future prices, and hence Salam is not an ideal means of projecting

future prices. He suggest that Istisna contract is presented as the appropriate backbone of

the Islamic futures market. Istisna is uniquely characterized by the built-in flexibility of

providing two simultaneous functions: a partial financing function and a partial hedging

function. When the partial financial function is eliminated and total weight is placed on the

hedging function, Istisna boils down to a forward contract. Accordingly, a good anchor will

15 Seif I. Tag El-Din , “The Question Of An Islamic Futures Market”, IIUM Journal of Economics and Management., Volume:12 (2004),Issue: 1, pp.1-20.

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be established for future price movements not particularly affected by an implied

‘discounting’ process. The Istisna-based forward contract is proposed here as an ideal risk

managing structure for a bankable profit and loss sharing (PLS) scheme.

Nathif J. Adam and Abdulkader Thomas16 “Islamic Bonds: Your Guide to Issuing,

Structuring and Investing in Sukuk” explain market perspectives on the development,

structuring and on the salient investment features of Sukuks and how securitisation

techniques have been successfully employed. How the Sukuk market segment is poised for

accelerated growth and the involvement of quality service providers will further demand

and attract global investors .

Bacha, Obiyathulla I,17 “Value Preservation through Risk Management - A Shariah

Compliant Proposal for Equity Risk Management”. This paper makes a case for the

preservation of Muslim Wealth through risk management. It provides an exposition of risk

management techniques used in conventional finance and outlines the limitations faced by

Muslim fund managers and businesses. This limitation arises from the proscription of key

risk-management tools, in particular financial derivatives. Though the reasons for the

prohibition are diverse, the overriding concern appears to be that they encourage

speculative behaviour. As such the emphasis of Islamic risk management has been on, On

Balance Sheet methods. The problem with On Balance Sheet methods is that they require

the restructuring of business transactions which can render businesses less competitive and

16 Nathif J. Adam and Abdulkader Thomas , Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk, Euromoney Books, London, 2004 17 Bacha, Obiyathulla I, “Value Preservation through Risk Management - A Shariah Compliant Proposal for Equity Risk Management”, The European Journal Of Management And Public Policy 1.3(2004), pp. 65-83

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subject to residual risk. The paper proposes a portfolio insurance scheme that uses the logic

and mechanics of conventional Index Put Options but in a Shariah compliant manner. The

proposal is intended to strike a balance between the need to avoid speculation and the

genuine need for hedging equity risks.

Munawar Iqbal, Ausaf Ahmad18, in “Islamic Finance and Economic Development”

explore the role and significance of Islamic financial system, instruments and institutions in

economic growth and development, both theoretically and empirically. As one of the crucial

factors in economic development is the saving/investment process. In conventional

economic systems,the interest rate mechanism is at the heart of that process, however an

Islamic financial system cannot rely on that mechanism.

Abdulkader Thomas Stella Cox, Bryan Kraty,19 in “Structuring Islamic Finance

Transactions” they explain the core principles of Islamic finance instruments, their

applications and structures. They point out Islamic finance position in the context of

modern financial developments and the growth of Islamic banking and Takaful. It explains

the fundamentals of Islamic finance product development and compliance with Islamic law.

They point out the complex structures and applications of Islamic transactions in the

modern financial environment, including those providing liquidity and risk management for

Islamic financial institutions. With covers partnership models, equity finance vehicles, the

structuring of leases, real estate finance applications, sukuk and Islamic securitizations, the

18 Muhammad al-Bashir Muhammad Al-Amine , in “Risk Management in Islamic Finance: An Analysis of Derivatives Instruments in Commodity Markets Palgrave Macmillan, New York, 2005 19 Abdulkader Thomas Stella Cox, Bryan Kraty, Structuring Islamic Finance Transactions, Euromoney Books, London, 2005

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emerging regulatory environment for Islamic finance products and transactions and the

Mudharabah, Musharaka, Salaam and Istisna models.

Saiful Azhar Rosly20 in “Critical Issues on Islamic Banking and Financial Markets:

Islamic Economics, Banking and Finance, Investments, Takaful And Financial Planning,”

provides the underlying principles of Shariah financial instruments and presented them in

actual and practical form. He has attempted to venture into several issues of Islamic finance

that incorporates the Quranic conception of trading and commerce (al-bay'). Profit created

from financial instruments devoid of risk-taking (ghorm) and value addition (kasb) does not

fit into the Quran's outlook of al-bay'. It critically examines current Islamic financial

products offered by banks, mutual funds and insurance companies and help guide

prospective customers to understand the underlying Shariah principles on which these

products are structured. Products ranging from bank deposits or assets and capital market

instruments are discussed based on prevailing practical experience in Malaysia as well as

other Muslim countries. Divergent Shariah opinions on sale-buyback (bay' al-'inah) and debt

trading (bay'al-dayn) are discussed with good intentions to harmonize global Islamic

financial transactions. Of most significant is the push for equity financing (musyarakah or

mudarabah) in the banking business with proper application of salam and istisna' contract

as well. Widespread use of murabahah and al-bai-bithaman ajil (credit sale) contracts in

Islamic finance is a worrying trend. He tries to explore the place of Islamic financial

contracts in modern financial markets, whether Islamic financial instruments actually reflect

20 Saiful Azhar Rosly ,Critical Issues on Islamic Banking and Financial Markets: Islamic Economics, Banking and Finance, Investments, Takaful And Financial Planning, AuthorHouse, Indiana, 2005

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true label. Implication of trading (al-bay') is expected to invite venture capital application in

Islamic banking and rationalizes universal banking model for Islamic banks.

Mansoor Durrani, Grahame Boocock21, Venture Capital, Islamic Finance And SMEs:

Valuation, Structuring And Monitoring Practices in India have focused on exploration of the

operations of the venture capital sector in supporting the growth and development of

SMEs. A distinctive focus is the analysis of techniques used by venture capitalists to value,

structure and monitor their investments. It also provides an empirical analysis of the role of

Islamic finance as an alternative source of risk finance for SMEs in India.

Mahmoud A. El-Gamal22 in his book “Islamic Finance: Law, Economics, and Practice”

he tries to overview the practice of Islamic finance and the historical roots that define its

modes of operation. The focus of the book is analytical and forward-looking. It shows that

Islamic finance exists mainly as a form of rent-seeking legal-arbitrage in every aspect of

finance from personal loans to investment banking, and from market structure to corporate

governance. Islamic finance aims to replicate in Islamic forms the substantive functions of

contemporary financial instruments, markets, and institutions. He point out that Islamic

finance is attempting to replicate the substance of contemporary financial practice using

pre-modern contract forms. Islamic finance has arguably failed to serve the objectives of

Islamic law. This book proposes refocusing Islamic finance on substance rather than form.

This approach would entail abandoning the paradigm of "Islamization" of every financial

21 Mansoor Durrani, Grahame Boocock, Venture Capital, Islamic Finance And SMEs: Valuation, Structuring And Monitoring Practices in India, Palgrave MacMillan, New York, 2006 22Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, And Practice, Cambridge University Press, New York, 2006

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practice. It would also entail reorienting the brand-name of Islamic finance to emphasize

issues of community banking, micro-finance, and socially responsible investment.

Angelo M. Venardos23 has explained in his book “Islamic Banking & Finance in South-

East Asia: Its Development & Future” the development of Islamic banking and finance in

South-East Asia. To understand Islamic one must first understand the religious relationship

originating from the Qur'an, and then trace the historical geographic and political

developments of Islam over recent centuries. And the book describe in detail, the financial

products and services offered, understand the challenges in their development, and

ultimately recognize the significant opportunities that Islamic banking and finance can

provide to both Muslims and non-Muslims.

Kathrin Nina Wiedl,24 “The Islamic banking system- Not conductive to the start-up of

young, innovative business firms” In this paper he discusses the influence of an Islamic

banking system on the start-up of young, innovative businesses. A negative influence would

hinder these businesses to develop – if not counterbalanced by other measures like state

involvement. In non-Muslim countries it would constrain religious Muslims from

participating in the contemporary economic changes, determined by an opening-up of

markets and privatization, which requires the start-up of new businesses. According to

Kathrin Nina Wiedl, Islamic banking system operates on several Islamic restrictions that limit

its freedom to develop suitable financing instruments for the support of young, innovative

businesses. These restrictions enlarge the risk of the bank especially when financing these

23 Angelo M. Venardos, Islamic Banking & Finance in South-East Asia: Its Development & Future, World Scientific Publishing Co. Pet. Ltd., Singapore, 2006 24 Kathrin Nina Wiedl, The Islamic banking system- Not conductive to the start-up of young, innovative business firms, GRIN Verlag Munich , 2006

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businesses, so the bank either avoids these businesses or tries to bend the Islamic law and

operates – de facto – like a conventional bank. In this case, however, the bank is facing

problems with the Religious Supervisory Board, an integral part of every Islamic bank, which

will stop the bank from deriving from the Islamic law. He discusses the existing interest-free

financing instruments of Islamic Banking suitable for the start-up of young, innovative

enterprises. He gives example of the PLS-concepts Musharaka and Mudaraba, the factors

that make these financing concepts not attractive for banks, especially when financing

young, innovative business. On the example of the Mark-up activities Murabaha (Trade

Financing) and Ijara/Ijara al-waktina (Leasing), Kathrin Nina Wiedl suggests that why these

concepts are only suitable for financing very special cases of young businesses and are not a

suitable alternative to Western banking concepts for the majority of young entrepreneurs.

Finally he gives ideas how to improve the system without violating Islamic law, but also

discusses the limits of the Islamic banking system.

Wafik Grais, Matteo Pellegrini25, “Corporate Governance in Institutions Offering

Islamic Financial Services: Issues and Options” This paper reviews institutions offering

Islamic financial services (IIFS) corporate governance challenges and suggests options to

address them. It first points out the importance of corporate governance for IIFS, where it

would require a distinct treatment from conventional corporate governance and highlights

three cases of distress of IIFS. It then dwells on prevailing corporate governance

arrangements addressing IIFS' needs to ensure the consistency of their operations with

25 Wafik Grais , Matteo Pellegrini , Corporate Governance in Institutions Offering Islamic Financial Services: Issues and Options, World Bank Publications, 2006

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Islamic finance principles and the protection of the financial interests of a stakeholders'

category, namely depositors holding unrestricted investment accounts. It raises the issues

of independence, confidentiality, competence, consistency, and disclosure that may bear on

pronouncements of consistency with Islamic finance principles. It also discusses the agency

problem of depositors holding unrestricted investment accounts. The paper argues for a

governance framework that combines internal and external arrangements and relies

significantly on transparency and disclosure of market relevant information.

Selim Cakir , Faezeh Raei26 in “Sukuk Vs. Eurobonds: Is There a Difference in Value-

at-Risk? (EPub)” assesses the impact of bonds issued according to Islamic principles (Sukuk),

on the cost and risk structure of investment portfolios by using the Value-at-Risk (VaR)

framework. The market for Sukuk has grown tremendously in recent years at about 45

percent a year. Sukuk provide sovereign governments and corporations with access to the

huge and growing Islamic liquidity pool, in addition to the conventional investor base. The

paper analyzes whether secondary market behavior of Eurobonds and Sukuk issued by the

same issuer are significantly different to provide gains from diversification. The analysis,

employing the delta-normal as well as Monte-Carlo simulation methods, implies such gains

are present and in certain cases very significant.

Kabir Hassan, Mervyn Lewis27 , Handbook of Islamic Banking comprises 25 studies by

leading international experts on Islamic banking and finance specially commissioned to

analyse the various debates and the current state of play in the field. From its origins thirty

26 Selim Cakir , Faezeh Raei , Sukuk Vs. Eurobonds: Is There a Difference in Value-at-Risk? (EPub), International Monetary Fund, 2007 27 Kabir Hassan, Mervyn Lewis , Handbook of Islamic Banking, Edward Elgar Publishing Limited, Cheltemtem,2007

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years ago, Islamic banking has expanded rapidly to become a distinctive and fast growing

segment of the international banking and capital markets. Despite this expansion, Islamic

banking still remains poorly understood in many parts of the Muslim world and continues to

be a mystery in much of the West. The book provides a succinct analysis of the workings of

Islamic banking and finance. At the same time, it seeks to bring the current research agenda

and the main issues on Islamic banking before a wider audience. Islamic banking offers, as

an alternative to conventional interest-based financing methods, a wide variety of financial

instruments and investment vehicles based on profit-and-loss sharing arrangements. These

are all explored in details along with other subjects such as governance and risk

management, securities and investment, structured financing, accounting and regulation,

economic development and globalization.

Nangi Sardehi,28 in “Islamic Capital Markets: Developments and Challenges”

scrutinizes the Islamic instruments and products and gives an overview of the products,

which includes Islamic equity funds, derivatives and debt instruments. The latter one known

as Sukuk is gaining an exceptional growth and acceptance even in non-Islamic countries.

Despite these developments, the author also emphasizes the challenges of the emerging

Islamic capital markets. Beside the market illiquidity and the diversification issue, the main

problem is the inconsistency among the Islamic schools.

28 Nangi Sardehi, Islamic Capital Markets: Developments and Challenges, VDM Verlag, Saarbrücken, Germany, 2008

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Ioannis Akkizidis, Sunil Kumar Khandelwal29, “Financial Risk Management for Islamic

Banking and Finance”, presents a common framework on how to efficiently manage the

risks faced, by identifying where the Islamic financial products and services are risk exposed,

to effectively minimise the overall degree of Islamic financial risks. They make studies on

how to practically implement the steps of risk management framework for the Islamic

financial institutes.

Muhammad al-Bashir Muhammad Al-Amine30, in “Risk Management in Islamic

Finance: An Analysis of Derivatives Instruments in Commodity Markets” Is talking about

derivatives instruments in Islamic finance. He highlights the benefits of these instruments,

their legal aspects and the appropriate alternatives. The forward, futures and options

contracts in commodity markets are discussed and the arguments in favour of and against

these instruments examined. The forward contracts issue includes the possibility of trading

gold in forward basis, the forward market for currencies and the possible alternative to

manage related risks. With the examination of futures contracts, the main argument against

such a contract is addressed such as the sale prior to taking possession and the sale of debt

hedging and speculation. He proposes khiyar al-shart and bay al-arbun as tools of risk

management and alternatives to options. The sale of pure rights is at the center of the

admissibility of options in Islamic law and is investigated comprehensively.

29 Ioannis Akkizidis, Sunil Kumar Khandelwal, Financial Risk Management for Islamic Banking and Finance, Palgrave Macmillan, New York, 2008 30 Muhammad al-Bashir Muhammad Al-Amine Risk Management in Islamic Finance: An Analysis of Derivatives Instruments in Commodity Markets, Brill,2008

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Scheme of Chapterization:

The entire study has been divided into seven chapters in order to have a synoptic

and comprehensive view of Islamic financial market. First chapter would provide

introductory background to the study. It also deals with the extensive review of literature

on the subject matter, scope of the study, objectives, the hypothesis and the research

methodology adopted for the research study

The second chapter would present a detailed discussion on the history and given

general view of financial market and its instruments. The chapter also deal with Islamic

economic thought, source of Islamic law and the feature prohibition of Islamic law toward

financial matter. The chapter ends with history of Islamic finance.

The third chapter would attempt to provide overview of global Islamic finance

industry. The study exams the industry by dividing into several regions namely South East

Asia, central Asia, South Asia, Middle East, Africa, Europe, North America, and elsewhere.

The fourth chapter would mostly deal with Islamic financial instrument and

infrastructure institutions supporting Islamic financial markets. The chapter provides a

detailed discussion on various kinds of Islamic financial instruments, its rule and structure.

The chapter also discusses on the role of International organization which tries to facilitate

Islamic financial industry.

The fifth chapter would go deeply into the details of the main component of Islamic

financial markets called Sukuk. The chapter discusses in detail the nature of Sukuk. Describe

the structure of Sukuk upon Islamic financial principle that it is built on. The chapter also

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attempts to provide overview of Sukuk markets, its market performance both international

Sukuk as well as domestic Sukuk.

The sixth chapter would discuss about other component of Islamic financial market

named Shariah-Compliant Equity, Islamic Funds and Derivative Products. Finally, the

seventh chapter is the conclusion chapter of this study. This chapter would provide the

summary of the main findings of the study and draw conclusion.