The Role of Islamic Financial Instruments in the Business of Islamic Financial Institutions

Abstract

Financial markets play an important role in stimulating an economy and mobilizing saving for investment operations. Development of these markets would be helpful in introducing Islamic banking and solving a number of contemporary economic problems. Islamic financial system can have both Money and Capital Market as also Primary and Secondary Markets with a different procedure of creation and trading of their instruments. Development of secondary markets and effective supervisory/regulatory system is equally important. This research deals with the markets that can function in Islamic financial structure and the instruments that have been developed for their functioning. It would also discuss why some kinds of markets and instruments have not been developed so far in Islamic finance discipline. Financial markets should be given due importance in order to discharge the obligation of preserving capital and ensuring its growth because they lead to fulfil the general human needs and discharge functions relating to capital. Islamic capital market will work on different set of principles. The Islamic Fiqh Academy of the OIC has observed, “Although the original concept of financial markets is sound and its application is very much needed in the present-day context, yet their existing structure does not present an example to carry out the objective of investment and growth of capital within the Islamic framework. This situation requires serious academic efforts to be undertaken in collaboration between the Fuqaha and the economists, so that it may be possible to review the existing system with its procedure and instruments and to amend what needs amendment in the light of the recognized principles of Shariah”.