Besides the prohibition on trading stocks that are haram, there is one major difference between conventional and Islamic stock broking and trading. Due to the fact that the underlying has to be owned, short selling is not permissible in Islamic finance.
Although short selling is often used as a speculation technique, it is also used as a market making tool. In order to ‘make a market’, brokers will quote both buy and sell prices.
Often they hold the actual stock, but this is not necessarily always the case, particularly when it concerns less liquid segments or at times of high trading volumes. An interesting comparison can be made with the Sukuk market, which is highly illiquid, and prices are not always available.
Often, only the large conventional players will be able to provide both a buy and a sell price since they are not restricted by short selling rules to the same extent.
Although short selling is not necessarily something to be condoned, there might be situations in which it will assist the development of the market.
DR NATALIE SCHOON
Formabb
Most brokerage firms provide execution-only services and as a consequence simply act on instructions from their clients. In these cases it is the clients who need to learn about Shariah compliance, not the brokers.
Brokerage firms which provide advice to their clients however have to be knowledgeable about which investments are acceptable and unacceptable from an Islamic perspective.
Unfortunately apart from in Malaysia there are few brokers who understand Islamic finance. Brokerage firms do not have Shariah boards, and those banks who perform brokerage functions rarely consult their Shariah boards about the issues involved, even wholly Islamic banks.
Clearly there is an advisory service gap. This can only be filled once clients start to be more discerning about where they seek advice and when leading brokers providing advisory services start becoming interested in Islamic finance.
People forget that brokerage and trading is driven by institutional investors. Retail plays a role, of course, but only a minor role in most economies. Brokers and traders need clients who themselves are asset managers with full discretionary mandates over large sums of client investment money.
In large and small economies worldwide, these institutional investors are insurance companies, pension funds, endowments, corporations, family offices and mutual funds.
Together these entities place buy and sell orders with their brokers and oversee trillions of dollars annually in trading volume. But where are the institutional investors in the Islamic space?
Since everyone has been so overly focused on private equity and real estate projects in the last decade, it seems that Islamic asset management is an orphan child. Really it is puzzling.
Where else in the world does private equity equal mutual funds in total size? This is what we have in Islamic banking, a highly skewed preference for illiquid, long-term and very risky investments that in the long-run proved to be highly inappropriate for investors.
What Islamic brokerage and trading needs is an abundance of Islamic asset managers, collecting and aggregating the long-term savings of households, endowments, pensions, insurance assets, family offices and general economic savings.
It is sad that even now it appears more resources are given to illiquid, high-risk investing than the type of asset management the Muslim world really needs. Let us hope this situation reverses itself and that we get bona fide Islamic asset managers up and running quickly.
JOHN SANDWICK
Islamic Wealth & Asset Management, Geneva, Switzerland