Characteristics of Islamic Capital Market

The characteristics of the Islamic capital market that we focused on in this study are, the Islamic capital market is a Shari’ah framework, the prohibited transactions in the Islamic capital market, the prohibition of interest, and the Islamic capital market are asset-backed financing. Islamic capital market products are designed based on Shari’ah law. Shari’ah scholars ensure that Islamic law is followed correctly and provide guidance to all Muslims. Besides, Islamic financial markets will be unable to function without Shari’ah compliance. Countries that promote the development of Islamic finance, have moved to establish, and implement Shari’ah governance frameworks. For instance, Bank Negara Malaysia, which is Malaysia’s central bank, has taken the lead in building a Shari’ah governance framework.

                           

Furthermore, the other characteristics are the prohibited transactions in the Islamic capital market, according to the hadith and the Quran, the Islamic capital market forbade Islamic securities that include equities of companies that engaged in illegal activities such as gambling (maysir), pork, alcohol, tobacco, pornography, trading with non-delivery of goods or services, trading with risk including ambiguity (gharar), and arms & ammunition. The primary reason why Islam prohibits these elements is to avoid any party suffering from injustice at the hand of others. This is because Islam is concerned with the well-being of society and protects it from danger and oppression.

                            

Aside from that, the prohibition of interest in the Islamic capital market. Every transaction in the Islamic capital market should be guided by the Islamic legal system, or Shari’ah, as established by the Islamic legal system. In other words, every transaction should comply with Islamic principles. The Shari’ah provisions are derived from the Quran and hadiths of the Holy Prophet. While Islamic transactions are generally free and fair, this freedom is not unlimited but therefore is restricted by Shari’ah such as the prohibition of usury (riba). Interest and investment in non-Shari’ah compliant firms are prohibited by the Quran and Sunnah. This is because the practice of charging interest puts the borrower in a difficult situation while benefiting the wealthy lender, whose money works as an asset, allowing him to accumulate more and more money. Regardless of the borrower's financial situation, the wealthy lender wants him to pay the principal plus some more interest. This method treats money as a commodity, ensuring not only the return of the principal but also the receipt of interest when it is due. There is an alternative. Except for the predetermined interest, the lenders will have no right to share the borrower's profit.

                            

Lastly, the Islamic capital market is asset-backed financing. According to the conventional understanding of finance, banks, and financial institutions only deal in money and monetary paper. That is why they are forbidden in Islam, except for some cases where exemptions are granted, for which it does not recognize money as a tool of exchange. Money has no intrinsic use. It is just a medium of exchange. Since each unit of money is 100 percent equal to other units of the same denomination, there is no room for profit in the exchange between these units. Profits are earned when something with intrinsic utility is sold for money or when multiple currencies are exchanged. According to ethical finance, profit generated from dealing in money (of the same currency) or the papers that represent, it is known as interest and hence it is forbidden. As a result, unlike conventional financial institutions, Islamic finance is always centered on illiquid assets that generate actual assets and inventories.

According to Shari’ah law, the true and ideal instruments of finance are Musharakah and Mudarabah. When a financier provides money based on these two instruments, it is almost certain that it will be turned into assets with intrinsic utility. Profits are earned through the selling of these actual assets, according to Islamic Economics regulations. Salam and Istisna's financing generates tangible assets as well. In the case of Salam, the financier receives genuine commodities and can earn them by selling them on the market. In the case of Istisna', financing is accomplished by producing some actual assets, because of which the financier profits. Financial leases and Murabahah were not initially financing methods.

Next, Comparison between ICM and Conventional Capital Market.