Capital Markets 183
therefore measures need to be taken to eliminate or discourage speculative
behavior. Recent scholars have distinguished between speculation and cal-
culated risk taking based on information available in the market. Several
measures have been suggested to reduce unwanted speculation and to elimi-
nate the element of gambling. These measures include designing a tax struc-
ture that is linked to the holding period of investment, introducing greater
transparency, regulating institutional investors who infl uence the market,
and imposing restrictions on price changes so that no dealer is allowed to
push prices upwards or downwards rapidly.
In the Islamic framework, although speculation is not unlawful per se,
professional speculators cannot exist, because most speculation is made pos-
sible only with funds borrowed on the prohibited basis of interest. However,
this counter - argument does not address the contribution of speculators to
price discovery, liquidity and the effi ciency of the markets.
On a related matter, it has been argued that the presence of ghabun,
the difference between the price at which a transaction is executed and the
fair price (as per the opinion of valuation experts), makes a transaction
unethical. The consensus view seems to be that marginal over - pricing is
permissible, but gross over - pricing should be curbed. The issue of fair prices
is also a tricky one, as pricing is a function of the information available in
the market and the expectations of investors about the market and the secu-
rity. Any measure, other than the forces of demand and supply, introduced
to enforce prices, will introduce unwanted distortions and ineffi ciencies.
Short Selling
Third, the practice of short selling a stock is not compatible with the principles
of Islam. According to Islam, an exchange contract is void unless the inten-
tion of the buyer is to buy and of the seller to sell, and that no - one sells what
he does not have. This raises the question of trading a borrowed fi nancial
claim which does not appear to be compatible with Shari’ah. By eliminating
the short-selling facility, markets will discourage speculative behavior but will
also eliminate arbitrage opportunities, which may hamper price discovery.
Equity contracts and markets for equity - based capital are so vital in
the Islamic fi nancial system that the absence of such markets will hinder
achievement of the full potential of the system. The structural and opera-
tional issues identifi ed above are diffi cult but not insurmountable. Financial
intermediaries cannot operate optimally without supporting markets and
institutions in the fi nancial system. Serious efforts should be made to encour-
age equity fi nancing.
SECURITIZED MARKET: SUKUK
Efforts to develop and launch a Shari’ah - compatible bond - like security were
made in Jordan as early as 1978, when the government allowed the Jordan
Islamic Bank to issue Islamic bonds known as muqaradah bonds. This was