Islamic Capital Market; (1) Equity Funds - Kickoffall Info Hub

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Tuesday, April 7, 2020

Islamic Capital Market; (1) Equity Funds

A financial marketplace is a place where people trade financial securities and derivatives. Islamic financial markets, like their conventional counterparts, comprise both the money market and capital market, but the instruments and the procedures of functioning are different.
Conditions of Islamic Financial Markets
  • An Islamic financial market works on profit and loss sharing principles and is free from the interest-based transactions.
  • The investment should be in a Halal business and should follow prohibitions in the Islamic financial system
  • The instruments on the basis of which the Islamic market has to function need to be backed by a real asset transactions.
  • The business should not involve in any uncertainty and speculation activities. 
Islamic capital market
Generally, a capital market is a financial market where long-term debt for more than one year or equity-backed securities is exchanged. A capital market can be further divided into primary markets and secondary markets. The primary market is where new stock or bond issues are sold to investors.  The secondary market is where existing securities are exchanged.
Islamic capital market (ICM) market is where long term equity-backed securities are bought and sold in ways that follow the principles of Sharia.  The main Islamic capital market products are (1) bond market (Sukuk) and (2) Equity Fund, (3) Islamic Mutual Funds, (4) Islamic Insurance.
Products of Islamic capital market:
Equity fund: Equity fund refers to a stock or any other security that denotes an ownership interest in a limited liability company. Equity ownership is obtained through an Initial Public Offer (IPO) or through purchase through Securities Exchange. In Equity Market, the profits are mainly derived through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also earned through dividends distributed by the relevant companies.
Conditions of Islamic Equity Market:
The main business of the company should be Sharia Compliant.
The company should not do involve in any interest-bearing transactions.
Debt to market capitalization: total debt divided by 12-month average market capitalization should be less than 33 %.*

*Various Islamic scholars are different opinions on the permission and percentage of the dept; Further reading is suggested. 

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