The Revolution of Trading and Brokerage with Islamic Finance

The Revolution of Trading and Brokerage with Islamic Finance
This article was first published in Islamic Finance News Annual Guide 2020.

The use of Islamic finance in the trading of financial instruments has been a very hot debate for years by Shariah scholars. According to Islamic finance principles, money itself cannot be used to generate profit which means those involved in Islamic finance cannot lend or earn money primarily to earn interest. However, it is acceptable to facilitate trading, fee-based transactions and investment activities which aim not for profit maximization but rather to support the development of the economy in accordance with Shariah principles.

Review of 2019

In the era of technological disruption, it is expected that the trading and brokerage industry will also undergo the same process as seen in the hospitality and transportation industries (such as Airbnb and Uber). Many financial institutions across the globe are taking measures to ensure their organizations are a step ahead by collaborating with up-and-coming fintech players. There is also a growing trend among regulators across the world such as the US, the UK and in Asia to create fintech sandboxes to help bring new players into their regulatory scope.

In an environment of thinning margins, volatile markets and slow global growth, cheaper and simpler financial services through technology are in demand to lower the operating costs. Islamic financial institutions are also not exempted from the disruption in the financial industry.

An example of evolution can be seen in the equity trading and brokerage sector. Back in the days, trading was done on the phone with no real time electronic execution. It was then abused by brokers as priority between client trades and proprietary trading became thin. Evolution in the industry came from real time trade execution monitoring and audit trail with a more transparent process for market participants. Such development was possible due to both demand by market participants and improvements in the technology available at such time.

Same can be said for the fixed income market.  The traditional fixed income market is a combination of voice  market  making  and electronic systems based largely on banks and their network  of clients. The market practice was typically based on the market maker where the broker dealer provides both way quotes to the bank’s dealer or client regardless whether there was an available taker. When the seller quote to the market, the market maker will bid and put in their book while offering it for margin back to the market. Such process requires the market maker to be able to hold assets on the balance sheet and negotiate with dealers for the best price.

However, then came the introduction of electronic brokerage on platforms such as Bloomberg. Dealers or clients can now submit quotes through the platform and find the best deals. This means that instead of contacting brokerage firms, a platform can also be a broker where it can cut the middleman and probably reduce its brokerage fees since it requires less manpower due to technology.

Preview of 2020

The example of the evolution illustrated above shows that the way of trading or brokerage can be disrupted and it is not uncommon to hear a brokerage firm closing shop as technology improves the whole process of trading from simplifying the execution process to providing transparency to market participants by providing relevant information faster with automation.

The rise of a new generation which distrusts financial institutions changes the social landscape.  Changes in demand will force a newcomer to meet the demand if the current system does not evolve. In this case, Islamic financial institutions cannot afford to ignore the march of technology.

The revolution of Islamic finance trading and brokerage is still in infancy stage. Malaysia introduced a peer-to-peer Islamic fintech platform where investors can invest in Islamic finance companies  at very lower fees by leveraging on technology. Innovation is no stranger to Islamic finance and technology is an enabler in Shariah principles. Just as how Islamic finance was a revolution to the conventional banking and finance industry, fintech too is disrupting the industry at the moment. The demand for Shariah compliant trading and brokerage will continue to increase as markets globally remain volatile and the economy continues to shrink.


In the future, trading and brokerage firms may need to take some risk in the dealing with clients, and not only rely on guaranteed commission income alone. Furthermore, as market participants demand lower brokerage costs, trading firms and brokerage houses dealing in Islamic products need to leverage on technology to make the transaction process simple and efficient while keeping the operating costs low. As regulators worldwide are looking into facilitating such an environment, market players need to create or plan the infrastructure in advance by innovating to meet the demand of the market in the future.

This report has been prepared and issued by Bond and Sukuk Information Platform Sdn Bhd (“the Company”). The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.

The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, the Company does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.

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