Functions of financial markets

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The financial market provides investors with money that is earned through borrowing from financial institutions. The market provides them with access to foreign exchange in the foreign markets where they are able to exchange different currencies. Finally, it provides a means for the acquisition of desired commodities through the normal buying and selling which is provided as a service by financial institutions especially the banks in the financial market (Copeland & Weston, 1988).

A financial market enables individuals to be able to access; derivatives, futures and capital. This are achieved through co-operation between the buyers and sellers. The buyers are the traders and investors while the sellers are represented by financial institutions and systems such as banks, foreign market and the stock market taking part in the financial market (Pilbeam, 2010).

The basics functions of the financial markets are; it enables traders to access insurance facilities for their businesses , it provides them with the opportunity to purchase commodities they desire using the different financial institutions as the intermediaries for carrying out the transactions and finally, it provides investors with money for financing their business either through lending or basically assets financing (Valdez, 2006).

Islamic Finance

This is a banking system that adheres to the basic laws of Islam and its principles that relate to money and finance. The system is built on the basic laws and principle of Islam known as Sharia law (Saeed, 1996).

Importance and effects on the financial markets

Islamic finance is usually against the charging of interest on money saved or borrowed. This principle is so strict according to the sharia law that even Islam’s have their own banking institutions that adhere to this law. The effect of this law is very important to parties such as banking, credit and microfinance institutions. They are to apply this when dealing with Islamic clients as they cannot lend with interest hence it is relevant for the institutions to come up with other avenues of revenue apart from interests.

This financial system is against the participation of Islam’s in various businesses that are not allowed by the Sharia law. Such businesses that are not allowed are; running alcoholic stores and participating in the pornographic industry.

This law is very effective as it deters financial institutions that operate in such countries that follow sharia law from financing start-ups in these businesses. It is also enables the financial market participants avoid transacting business with such persons who are intending or already operating these unlawful businesses (Saeed, 1996).

Prohibition of investments in uncertain transactions and contracts are a pillar of this system. This fact limits the different participants in the financial markets such as banks from offering bonds to companies that may be involved in such uncertain contracts.

The idea where investors take part in business due to speculative purposes is also prohibited in this system. Speculation is usually applied in the stock markets where investors and stock brokers buy and sell stocks in the expectation of a rise in the sell prices. This type of investment is not allowed under the Islamic finance system and thus its effect in the stock market is immense as it may prevent investors who are Muslim from participating in the same. This reduces the amount in the stock market (Saeed, 1996).

Islamic finance does not support gambling in any way. Most casinos that are usually the places for gambling tend to participate in the stock exchange and bank in financial institutions such as banks. Thus, the effect of such would mean the participants in the financial market cannot support such business in whatever manner.

References

Copeland, T. & Weston, F. (1988). Financial Theory and Corporate Policy. Massachusetts: Addison-Wesley.

Pilbeam, K. (2010). Finance and Financial Markets. Canada: Palgrave.

Saeed, A. (1996). Islamic Banking and Interest. Leiden: E.J.Brill.

Valdez, S. (2006). An Introduction To Global Financial Markets, London: Macmillan.

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Functions of financial markets

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