How Islamic finance market is always a safe zone?

Economics 29 Apr 2021 Contributor
islamic finance
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Islamic finance is enjoying an uprising in popularity, with more than 14% annual growth in current years. Moreover, the interest in Shariah-compliant stocks and bonds is also enjoying a surge in both the non-Muslim and Muslim world.

Recent researches of experts show that there are a number of good reasons for the growth. Actually, Islamic markets were not rocked 2009-10 financial years as equal to the conventional markets. Thus, it can be considered a new safe zone for investors.

The popularity of Islamic financial laws and ways are not at all surprising. Islamic law prohibits interests or riba and gambling or qimar. Dicey and not-so-transparent transactions, which are called gharar are also prohibited. This means a large number of assets and common business strategies are banned according to our pious religion.

Shariah-compliant bonds and benefits in the Islamic finance market

To encompass this problem, Islamic banks issue Shariah-compliant bonds called Sukuk. Conventional bonds have a contractual obligation to pay interest and principal on a specific date. When Sukuk bonds are sold, the money is used to invest in an asset. The bondholders get partial ownership of this asset. Thus, the payments come from the after-tax profit made from that asset. After the maturity, the issuer is obliged to buy the bond back at the value it was bought for.

There are also other shariah-compliant stocks, which comply with the risk-averse standard. For example, low debt to income ratio. Also, the company should have limited engagement with sinful activities like alcohol and tobacco in Islam. Therefore, it can be said that Islamic stocks are attractive to both Muslim and non-Muslim investors.

Why is the Islamic financial market a safe zone?

There have been various financial crises to destabilize stock markets over years. The Asian financial crisis of 1997, the UK and US crisis in 2007-08, and so on. These caused the market to become unstable, which resulted in substantial losses. Therefore, a search for markets that are less influenced by these kinds of crises.

Researchers have compared Islamic indexes with conventional markets during crises in the last decade, in five regions, named US, UK, Canada, Japan, the Eurozone, and the Asia Pacific. It has been found that the Islamic stock market is more stable than the non-Islamic markets.

These outcomes are true for global financial crises. The pattern of the net volatility spillovers between Islamic and non-Islamic markets shows that the Islamic index moves against the conventional index in crisis periods.

Shariah-compliant properties will not save the investors from losses totally. It will also not always act as a cushion against all financial shocks. But, nonetheless, Islamic markets will always be less affected by world financial shocks. Therefore, we can always say that the Islamic finance market is indeed a new safe zone, both for Muslims and non-Muslims.