The emergence of a distinct Islamic capital market, where investment and financing
activities and products are structured in accordance with Shariah principles, is
therefore the outcome of a natural progression in the growth of the Islamic financial
services industry. As outlined earlier, the pressing need to address liquidity
management for Islamic banks andtakaful operators prompted several countries –
such as Malaysia, Bahrain, Kuwait, Sudan and Iran – to introduce Islamic bonds to
facilitate the management of assets by Islamic financial institutions.
Whilst there had been earlier efforts by the Governments of Jordan and Pakistan
to introduce a legal framework for Islamic bond issuance, the first successful issuance of
Islamic bonds wasinitiated by the Malaysian Government in 1983 with the issuance
of the Government Investment Issue or GII (formerly known as the Government
Investment Certificate or GIC). The main objective of this issuance was to facilitate
the management of assets in the Islamic banking system, which, by this time, was
fairly mature. The issuance of GII is based on the Islamic concept of qardh hasan(benevolent loan) non-interest bearing loans. However, GII was not a tradable
instrument under the concept of qardh hasan, which did not permit secondary trading.
Recently, the underlying concept of GII was changed to bai` al-`Inah to allow it to be
traded in the secondary market.
Similarly, the Central Bank of Kuwait issued interest-free bonds to finance the
purchase of properties heldby nationals other than Gulf Co-operation Council states.
Iran has also introduced the concept of participation bonds on a mudharabah basis.
The success of numerous Islamic bond issuances worldwide opened up an alternative
source of funding, which is now tapped by many countries and corporations.
Another aspect of the early part of the development of the Islamic capital market was
theneed to establish clear guidance on the types of equities that comply with Shariah
requirements. The review and identification of Shariah-compliant stocks are guided
by specific criteria set out by Shariah scholars. In Malaysia, the initial efforts to
provide a list of Shariah-compliant stocks were undertaken by Bank Islam Malaysia
Bhd in 1983. This was later followed by the introductionof a list of Shariahcompliant stocks in June 1997 by the Securities Commission of Malaysia.
The implementation of a process to identify Shariah-compliant stocks facilitates the
establishment of Islamic indices. The first Islamic equity index was introduced in
Malaysia by RHB Unit Trust Management Bhd in May 1996. This was followed by
the launching of the Dow Jones Islamic Market Index(DJIM) by Dow Jones &
Company in February 1999, the Kuala Lumpur Shariah Index (KLSI) by Bursa
Malaysia in April 1999 and the FTSE Global Islamic Index Series by the FTSE Group
in October 1999.
With Shariah investment guidance in place, the establishment of Islamic investment
funds gained momentum. The Amana Income Fund, the first Islamic equity fund to be
established in theUnited States, was formed in June 1986 by members of the North
American Islamic Trust (NAIT), an organisation in Indiana, which oversees the
funding of mosques in the United States.
In 1987, Dallah AlBaraka Group
established two companies, namely Al-Tawfeek and Al-Amin, which were
specifically dedicated to the development of Islamic equity funds. These companies
have successfully launcheda number of Islamic funds focusing on such diverse
sectors such as real estate as well as international equities.
Today, there is a wide array of Islamic capital market products and services to meet
the needs of those who seek to invest in compliance with Shariah principles. These
include Shariah-compliant stocks, Islamic bonds, Islamic funds and Islamic risk
management products. The...