Mechanics & operations of an Islamic financial market

Islamic and conventional securities markets have two main differences: the Islamic market can have only equity-based and profit-and-loss sharing instruments; and these instruments cannot have a guaranteed and positive rate of return. An Islamic securities market would feature a better primary market, while in the Islamic secondary market open-ended and medium- and long-term instruments would be relatively more liquid than short-term instruments. Since the interest-based treasury bills and interbank markets (which conventional banks use to achieve an acceptable tradeoff between liquidity and profitability) are not available in an Islamic financial framework, alternatives need to be explored. Central banks in Muslim countries should keep Islamic banks under close scrutiny and should step in as lenders of last resort to keep Islamic banks, and thus their cause, alive. Since equity-based financial instruments are important in an Islamic economy, an effort needs to be made to create an effi