This lesson explores the instruments and markets that provide liquidity and investment opportunities within the Islamic financial system.

4.1 Sukuk (Islamic Bonds)
Sukuk are Shariah-compliant certificates of ownership that represent a proportional undivided share in an underlying asset or pool of assets. Unlike conventional bonds (which are debt obligations), Sukuk holders have an ownership stake in the asset. Sukuk are used for long-term financing and are a critical component of the Islamic capital market .

4.2 Islamic Treasury Management
Islamic banks face unique challenges in managing liquidity due to the prohibition of riba (interest). They use Shariah-compliant instruments for short-term liquidity management, including:

• Commodity Murabaha: Often used for interbank liquidity management, involving the purchase and sale of commodities on a deferred basis.

• Wakala (Agency) Deposits: One party acts as an agent on behalf of another to manage funds in a Shariah-compliant manner .

• Shariah-Compliant Benchmark Rates: AAOIFI has been developing a new standard for “Development and Governance of Shariah-Compliant Benchmark Rates” to offer alternatives to conventional benchmarks (e.g., LIBOR). A proposed model uses a benchmark rate based on macro-level economic indicators .

4.3 Islamic Equity and Investment Funds

• Islamic Equities: Investment in stocks is allowed, subject to screening criteria. Companies must be engaged in permissible business activities, and their financial ratios (debt-to-asset, etc.) must meet Shariah-compliant thresholds.

• Islamic Investment Accounts: Unlike conventional savings accounts that pay a guaranteed interest rate, Islamic investment accounts (based on Mudarabah) provide a share of the actual profit or loss generated by the bank’s investments. This is a core differentiator .