Innovation must to ensure sustainable growth in Islamic primary markets

19 June 2007-Islamic primary financial markets are undergoing a phenomenal per annum growth of 67 per cent, as primary Islamic issues are forecasted to end 2007 at a market value of $60 billion and that figure is expected to reach around $80 billion to $100 billion within the next five years, according to Abdulkader Thomas, President and CEO of Shape Financial Kuwait. However, insufficient reforms in regulatory frameworks, disclosure directives, and other infrastructural issues as well as the dearth of innovative Islamic financial instruments and products conducive for primary market transaction, especially in the sector’s core Middle East market, could stem that growth beyond the projected time period.

Speaking to Bahrain Tribune on the sidelines of the Second International Islamic Financial Market Conference, Thomas said: “With the limited number of Shariah-compliant financial products available for Islamic primary market investors and inconsistencies in fatwa issuances and cross-border regulatory measures, many of them become compelled to utilise a series of reverse Murabaha instruments and go through other accompanying complex procedures to manage portfolio assets and equity. The hassle associated with such a situation tends to slow down the flow of funds into the market, thus adversely affecting its relative liquidity over time.”

“As Shariah-compliant capital markets continue their march towards a critical mass, more innovative primary market products for the Islamic financial field need to be developed and done so quickly to keep pace with the recent surge in worldwide interest,” said Dr. Obiyathulla Ismath Bacha, Senior Representative of the Islamic Research and Training Institute. “One of the latest and few financial instruments to have debuted on the Islamic primary market during the past decade have been Islamic profit rate swaps, which are mainly employed to manage interest rate fluctuations in relation to a stock price. After the introduction of the swap instrument, the product development side of the sector became much quieter and so did the primary markets themselves in terms of liquidity, despite the massive and ever-expanding Islamic capital pool.”

Bacha blames the sluggish rate, at which Islamic primary market products are being developed, on the absence of an adequate Shariah-compliant approach to determine fair pricing for such instruments and lack of consensus among Shariah scholars regarding the branding of new products as either haram or accepted. “These challenges have turned the Islamic primary market model into a less transparent entity with conflicting regulations, keeping most non-Muslim investors away from the sector while decelerating the inflow of funds from the Islamic investor pool.”

Reference:: Innovation must to ensure sustainable growth in Islamic primary markets

Islamic Capital &
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