Discussion and

Recommendation
How the Islamic fi nancial instruments contribute to capital market?

Financial instruments play a decent role in Islamic capital market. Islamic financial
instruments are traded by don't conflict with the Shariah principles because it plays a awfully
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 identify which of these 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 form sure the equitable allocation of capital to
the sectors which could yield the only of returns to the owners of capital additionally ensure
sufficient investments opportunities to attract surplus funds in accordance with the owners'
preferences in terms of the extent of risk involvement, rate of return further thanks to the
amount of investment.

Aside the necessity for using Islamic Financial Instruments to get funds for investments,
expansion and day-to-day operational issues, financial instruments are employed in hedging
against risks and uncertainties that prevail in business environment. Financial Instruments
may be grouped into bank-based instruments and capital market-based instruments in Islamic
capital market. to avoid the danger of capital mismatch, businesses often study their funding
needs and chose an appropriate financial instrument that meets their finance objectives
supported the timing of funding, expected returns and funds’ gestation. it's therefore sufficing
to keep up that financial instruments of short-term nature are issued by banks, while the
medium and long terms instruments are capital/ stock market-based instrument. Islamic
financial instruments as providing a wider instrument as both conventional and Islamic
investor can utilise them. As more companies hunt down shariah-compliant status to tap the
broader investor base, the permissible investment universe becomes large, providing more
robust selection of companies to invests seeking an Islamic investment approach. Islamic
financial instruments are classified either supported measure instruments or the capital
market instruments.
Groups financial instruments into two like instruments for mobilizing funds and therefore the
instruments for utilizing funds. Islamic financial instrument mobilizing funds to capital
market. The resources mobilization is achieved through the deposit money banks’
instruments just like the savings accounts, current accounts, investment accounts and Sukuk
(Islamic Bond).However, for Islamic financial instruments, there's no interest on any amount
save and there's no predetermined returns expected on the deposit. With regards to savings
accounts, only percentage is permissible under Islamic finance, whereas interest is paid to
depositors under conventional finance. Money is such account are meant to get returns in
variety of profit or loss which depends on the money is employed for. Sukuk is another
instrument of mobilizing funds for Islamic capital market. Issuer also undertakes to buy-back
the certificate within the future at the nominal value of the instrument. The sukuk that confers
partial stake in debt is termed Sukuk- Murabaha, stake in assets is termed sukuk al-Ijarah, in
normal business is termed sukuk al-musharakah and in investment is termed sukuk al-
istithmar.

Besides, the financial instruments will react as instruments for utilizing funds within the
capital markets. In order to effectively utilize the funds generated by instruments of resource
mobilization, four instruments of utilization under Islamic capital market are clearly
identified for discussion, they are: The Musharakah—Equity participation; Mudarabah—
Partnership; Murabaha—Mark-up/Losses and at last the Ijarah or Leasing . Under Mudarabah
(Partnership), the bank and therefore the entrepreneur go in voluntary business association
which allows the bank to contribute capital while the client contribute his entrepreneurial
skills. Arrangement could even be made to gradually reducing the capital because the
business progresses to allow for payment of returns supported unpaid capital balance.
Musharakah or equity participation is additionally another utilization instrument where in
both the bank and client contribute to the capital, managerial capabilities, regular assets and
technical experience needed to run a business. At the end, profits and losses are shared in
keeping with negotiated terms. Mudarabah is an instrument which allows bank to get assets,
machinery or domestic appliances within the capital markets. Ijarah is additionally a variety
of assets financing, an asset owned by a client may well be sold and lease back to seller
within the capital 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 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 does not 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 or 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 could not.

Inadequate regulatory framework

The rapid development and innovation in Islamic financial instruments have 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.

REFERENCES

1) Her..., D. A. (n.d.). An overview of Islamic capital market in Malaysia. Retrieved

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laysia
2) ISLAMIC ACCOUNTING PRACTICES - THE IMPORTANCE OF ISLAMIC
CAPITAL MARK... Retrieved from
https://www.slideshare.net/AdillahArifha94/islamic-accounting-practices-the-
importance-of-islamic-capital-market-in-malaysia