The Role of The Capital Markets In The Development of Islamic Finance In Our Country And The Importance of Islamic Fund Management

In today's financial ecosystem, both Islamic and conventional capital markets are significant stakeholders of the general financial system.

The Role of The Capital Markets In The Development of Islamic Finance In Our Country And The Importance of Islamic Fund Management

 The fact that the actors of the Islamic Capital Market do not operate on interest, uncertainty (risk), speculation, illegal and religiously impermissible assets and bases distinguishes the system from the conventional structure in a positive way.

Operations are performed within the framework of a system that allows the issuance of securities such as stocks and sukuk in compliance with the Sharia provisions in the relevant market. In this way, it is possible to evaluate the liquidity of the public sector, private sector, and households in both primary and secondary markets within the context of investment areas in line with Islamic principles.

Therefore, they act as a catalyst in order for increasing the economic depth by including the idle and under-the-mattress savings of interest-sensitive institutions and individuals into the financial ecosystem.

Moreover, the said system has the basic features of interest-free banking, such as share of the risk/return balance of capital market instruments, developing a partnership culture, and investing in an underlying asset. 

Basic Criteria Distinguishing Islamic and Traditional Fund Management Systems

Several basic criteria that distinguish the transactions and actions of fund management companies operating within the framework of Islamic principles and conventional companies can be listed as follows:

•    Principle of Compliance with Islamic Economics and Sharia Provisions;

The transaction regarding the selection of the portfolio in which the relevant fund invested must absolutely comply with the Sharia practices. It is vital that the stocks and/or real underlying assets selected for investment are within the framework of Islamic Economics.

•    Principle of Transaction Based on Contracts;

The relationship between the fund management company and the investor must be based on a wakala or mudarabah contract. Investors who want to utilize their funds in the relevant contracts may advance the transactions as a principal and the fund management company as a proxy. 

•    Principle of Appropriate Pricing;

As mentioned above, labor and management pricing is in question in transactions carried out on a wakala basis. In some cases, wakala-based pricing performance may be mutual, while in mudarabah contracts, the profit-sharing situation specified in the relevant contract takes place.

Fund management companies operating under Islamic principles play a significant role beyond their fund management mission. They mediate the effective use of both domestic and foreign resources, channel the relevant funds to capital use when necessary, and manage risks and liquidity through appropriate dynamics, and thus, contribute to the entire ecosystem. 

In addition, the Islamic fund management organization provides significant functionality especially for emerging markets, in order to establish financial stability by deepening the financial markets. In order for these functions to appear more clearly, the factors affecting the development of the industry should be carefully examined. The main factors affecting the development of the industry can be categorized as follows;

Key Factors Influencing the Development of the Islamic Fund Management Industry

General Recommendations for Developing the Islamic Fund Management Industry 

•    Establishing a culture of institutional and retail investors in which Islamic funds are a savings and investment tool,
•    Establishing the basic infrastructure regarding the legislation and tax system,
•    Conducting publications and academic studies that will increase national and international awareness of Islamic investment funds,
•    Providing options to investors by offering product diversity
•    Carrying out studies to include foreign and domestic fund investors in the ecosystem,
•    Making investments for the development of human resources and human capital related to Islamic fund management,
•    Enabling market stakeholders to raise awareness by establishing special working groups to work on the development of the sector.

In order for the fund management system in compliance with Islamic principles to reach the level it deserves, the requirements we have mentioned above are of vital importance. It is essential that the methodology to be put forward is based on a certain system, and the duties and responsibilities of all stakeholders and the roadmap are determined in short, medium, and long terms.

İbrahim Gökburun

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