Secondary market stagnant

19 June 2007- Yauvapa Siriwattasit Business Reporter Despite a securitisation market worth $2 trillion in an overall sector that boasts of over $500 billion of Shariah-compliant assets under management worldwide, Islamic secondary markets currently stand at a value of just $20 billion with a growth rate steady at only 20 per cent per annum over the past decade or so, Lilian Le Falher, Senior Manager and Head of Treasury at Kuwait Finance House, Bahrain, told Bahrain Tribune at the Second International Islamic Financial Market (IIFM) Conference yesterday.

“The figures denote a state of stagnation in the Islamic secondary market, regardless of the 15 to 20 per cent expansion rate being witnessed for the entire Islamic capital market sector,” said Falher. “Fundamental factors behind the circumstances include the absence of an Islamic equivalent of a bond market to tap into the ever-increasing secondary market liquidity pool and standard Shariah-compliant contracts for known Islamic financial instruments, including Murabaha, Mudaraba, and the like.”

Danie Marx, Head of Treasury and Capital Markets at the European Islamic Investment Bank, added: “Lack of an official sukuk and Islamic financial instrument market has reduced the liquidity of the Islamic secondary markets into a trickle, stalling the sector somewhere between the introductory and growth phase. Recent efforts to broaden Islamic product offerings in these markets have thus hit an impasse due to the scarcity of competitive secondary markets to power the endeavours. Consequently, about 80 to 90 per cent of what investors are getting in terms of Shariah-compliant financial products and instruments happen to be Murabaha-driven, presenting them with little room to manoeuvre when encountering unique trading circumstances.”

Qudeer Latif, Lawyer of Clifford Chance, pinpointed the prevalent need for contractual standardisation as another culprit for the Islamic secondary market’s stolid performance. “Currently, there are 20 different formats of investment agreements floating around in the Islamic secondary market. This has caused enormous hassles for both Islamic investors and financial intermediaries in the form of voluminous documentation, high legal fees, consistent re-negotiation of terms and conditions for every similar contract, and elevated legal risks. Since there is a positive correlation between the use of standard contracts and increased market liquidity, the adverse implications of varying contractual obligations for standard Shariah-compliant products have not aided the Islamic secondary markets in gaining more liquidity as investors are being indirectly barred from moving resources away from commoditised products into new products to guard against unforeseen and systematic risks.”

Reference:: Secondary market stagnant

Islamic Capital &
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Unification
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