The Islamic capital market has grown in leaps and bounds, and as the equity market develops Islamic stockbroking is also on the rise. WAN RIZAIDY W MAMAT SAUFI explores the leading stock exchanges that handle Islamic trading, and looks at the possibility for a dedicated global Islamic stock exchange.
Although the development of Islamic finance started as early as the 1960s with the establishment of various interest-free deposit institutions, the development of the Islamic capital markets — in particular equity investment and fundraising — has only really taken off in the last 15 years.
In Malaysia it unofficially began with the introduction of Shariah compliant stocks by Bank Islam Malaysia in 1983, which later formally made up part of the Shariah compliant stock list introduced by the Malaysian Securities Commission in 1997.
On the global front, index provider Dow Jones initiated the creation of the first global Dow Jones Islamic Index in 1999. Since then, the screening of listed securities has evolved positively with the introduction of various Islamic equity indexes.
Increased interest from investors globally has also initiated the establishment of a number of Islamic equity funds. The continued interest in ethical and Islamic investment has also instigated the development of Islamic stockbroking services in several jurisdictions, including Malaysia. Bursa Malaysia, the Malaysian exchange, for example, has come out with a best practices guide for Islamic broking services. To date there are six Islamic stockbroking establishments in Malaysia, which include fully-fledged Islamic stockbrokers as well as window services.
But do we really need dedicated Islamic stockbroking? Some even believe we need dedicated Islamic stock exchanges. Again here we have differences of opinion, with some quarters saying we need end-to-end Islamic services to support Islamic investment activities; while others say it would create inefficiency and divide market liquidity. Both have their justifications and reasoning to support their views.
It is not my intention here to put up an academic or technical discussion of the matter, but rather to explore the actual progress of this emerging segment of the Islamic capital market.
Apart from Malaysia, globally others have also taken the initiative in response to the demand for end-to-end Islamic services, such as the establishment of fully Shariah compliant trading platforms. Some companies are already offering Islamic brokerage services on top of their Shariah screening processes. Unfortunately we don’t have much information on how these firms have progressed or how successful they have been.
Following the global financial crisis, investors globally are moving their investments towards safer and less complex investment structures. Listed instruments on recognized stock exchanges have become key for investment house in making investment selections.
According to Ernst & Young’s Islamic Funds and Investments Report 2011, Islamic fund investment in equity represented nearly 39% of the assets under management of Islamic funds by category in 2010. Although the figure may also represent non-listed private equity, it shows that interest in equity investment has grown significantly in comparison to the early days of modern Islamic investment; where previously GCC-based funds and investment were keener on real estate investment.
In relation to the development of the Islamic equity market globally, major exchanges such as the London Stock Exchange and Bourse Luxembourg have stepped up their efforts to accommodate and offer facilitative measures to admit the listing and trading of Islamic instruments.
Unfortunately, the national exchanges of OIC member countries are still lagging behind in tapping this niche market. OIC member countries’ exchanges are still struggling to meet international standards and many have yet to become members of the World Federation of Exchanges (WFE) – which would further facilitate cross-border offering and trading of Islamic equities.
From the WFE member list of 2013, only a few exchanges including the Saudi stock exchange, the Amman exchange, the Muscat exchange, the Egyptian exchange and Abu Dhabi are members from MENA region; whereas other exchanges such as Qatar, Bahrain, Beirut, Tunisia and Palestine are affiliate members. A coordinated or bilateral approach is needed among the interested exchanges and brokers in establishing a group of recognized exchanges for Islamic equities within the global equity market.
The establishment of the Member State Stock Exchange Forum under the OIC, over the past four years, has provided a platform to discuss international cooperation activities and offer the opportunity to share experiences amongst exchanges. The forum has created a momentum towards greater bilateral cooperation and understanding between exchanges in promoting cross-border trading of Islamic equity and the development of the Islamic capital market.
Among the rapidly developing exchanges within the MENA region and OIC member countries, the Saudi stock exchange (Tadawul) has been growing significantly since its first informal public share offering in 1955. Following the establishment of the Saudia Arabian Capital Market Authority (CMA) in 2004 and the incorporation of Tadawul in 2007, at the end of 2012 market capitalization of the exchange stood at SAR1,400 billion (US$373.42 billion). Tadawul is the largest exchange in the Arab world based on market capitalization.
According to the Tadawul Annual Statistical Report 2012, the daily average number of transactions executed in 2012 alone reached 167,750,000 in trade, an increase of 62.84% from the previous year. The daily average value of shares traded in 2012 amounted to SAR7.68 billion (US$2.04 billion), an increase of 73.48% from 2011.
One interesting fact about the Saudi equity market is that the major players in the market are individual investors. Based on the Tadawul 2011 Annual Report, individual Saudi national participation represents more than 80% of the market.
Another important feature of the Saudi market is its increasing accessibility for foreign investors. In 2008, the CMA issued a resolution introducing a framework that allowed non-resident foreign investors to participate and invest in shares listed and traded on Tadawul via equity swap agreements, as long as they were undertaken through authorized persons such as licensed brokers.
According to HSBC EMEA equity research in 2012, since April 2009 swap agreements to buy Tadawul listed securities have totaled SAR40.7 billion (US$10.8 billion) against SAR35.9 billion (US$9.5 billion) in swap sell agreements over the same period: which translates to a net inflow of just SAR4.8 billion (US$1.3 billion), over the last three years.
Looking at Saudi Arabia, Malaysia and few other growing exchanges, there is ample room for growth and development. Further awareness and development of the Islamic capital market globally, focusing on other asset class apart from Sukuk, could further increase Islamic stockbroking and trading activities. Greater bilateral or unified initiatives such as the OIC Member State Stock Exchange Forum should be supported to facilitate cross-border trading of Islamic equities globally.
Going forward, with the increased number and volume of Islamic equities and the continuous liquidity provided by Islamic funds, perhaps in the near future we could see the dream of a global Islamic stock exchange become a reality.
Wan Rizaidy W Mamat Saufi is an Islamic finance practitioner based in Saudi Arabia. He can be contacted at
[email protected]
.