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A financial market may be defined simply as a market for the exchange of capital and credit in the economy. Money markets concentrate on short-term debt instruments; capital markets trade in long-term debt and equity instruments. The purpose of these markets is to channel savings and surplus liquidity into long-term productive investments. In economics, a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity. o Financial Market Instruments

Financial Market instrument are defined as long-term financial instruments generally with maturity exceeding one year. Capital Markets
The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities. A capital market is a market where both government and companies raise long term funds to trade securities on the bond and the stock market. It consists of both the primary market where new issues are distributed among investors, and the secondary markets where already existent securities are traded. In the capital market, mortgages, bonds, equities and other such investment funds are traded. The capital market also facilitates the procedure whereby investors with excess funds can channel them to investors in deficit. o Islamic Approach for the Financial Market Like conventional markets, Islamic financial markets have two components: capital and money markets. The Islamic Financial Market (IFM) refers to the market where the financial instruments are traded in ways that do not conflict with the Shari’ah principles. In other words, the IFM represents an assertion of religious law in the financial market transactions where the market should be free from the involvement of prohibited activities by the Shari’ah. Most of the financial instruments used in contemporary financial markets are based on interest, which is clearly prohibited in Islam. Hence, development of financial instruments whose provisions, terms and conditions do not violate Shari 'ah principles, is the first and foremost requirement towards the evolution of Islamic capital markets. Secondly, most of the practices of capital markets, in handling financial instruments may also be repugnant to both Islamic law as well as Islamic norms of morality. There is a need to review the present practices prevailing in the financial market to identify which of these practices needed to be reformed from an Islamic point of view and which of them may be acceptable. Thirdly, institutions, which may be conducive to functioning of Islamic financial markets, need to be established. Islam is not averse to the idea of financial intermediation. It is a fact, that whatever be the form of economic organisation, a society, may have surplus and deficit households in terms of possession of financial resources. Hence, efficient use of financial resources of the society would necessitate some form of cooperation between the surplus and deficit units. o Key features of Islamic capital market instruments

a) Instrument should represent share in equity, real assets, usufruct or a combination of some or all of these and should not earn money on debt. 1) Instrument representing real physical assets and usufruct are negotiable market price. 2) Instrument representing debts in their negotiability are subject to rules of hawalah. 3) Instrument representing a combination of different categories are subject to rules relating to...
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