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Islamic Finance: Is the Time Ripe for a Private Sector Trade Association?

By Robert B Gray

The growing significance of Islamic finance has brought into sharp focus the similarities and the potential for convergence with respect to market practices between conventional modes of financing and the market for Shariah-compliant instruments. Can the market for Islamic Finance and instruments maintain its momentum without emulating the more standardised approach associated with the conventional market? But might that convergence do violence to some of the fundamental principles of Islamic finance?

“Can the market for Islamic Finance and instruments maintain its momentum without emulating the more standardised approach associated with the conventional market? But might that convergence do violence to some of the fundamental principles of Islamic finance?”

The growth of Islamic capital market securities (Sukuk) has been a particularly notable market development by any measure; and it is in relation to the Sukuk market that we are seeing a particularly lively debate on the pros and cons of standardisation and harmonisation. The growth of the Sukuk market has been made possible by the compatibility of Shariah law with traditional common law tenets. Although investors will need to be satisfied that a particular transaction is compatible with Shariah law precepts, the Sukuk documentation itself will be governed by Western law, typically the laws of England; the remedies available to any party, and the situs for dispute resolution will therefore depend on traditional legal procedures. Expressed another way, the enforceability of terms and conditions depends on the governing law of an Islamic finance contract; there is no provision for the choice or application of a non-national system of law, such as the Shariah. The scholar’s opinion on the compatibility of the transaction with Shariah law will not typically be incorporated into the underlying documentation.

The conventional international bond market has been characterised by an inexorable process of standardisation and harmonisation of market practices. This process became necessary due to the increasingly rapid time frame within which conventional bond issuance takes place. The speed of the process was given a major impetus by the use of global debt issuance programmes starting in the mid 1980s. The virtue of such issuance in “shelf” format was both speed and the accessibility of base documentation to investors and underwriters. Debt programmes are now an established feature of the international capital market.

“In looking at the role that participants in today’s Islamic capital markets can play in developing well functioning market practices, it may be instructive to look at what happened in the Eurobond market in the mid 1980s.”

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