Capital Markets 203
Standardization of Legal Framework One major reason for this ineffi ciency is
that the majority of the markets in Islamic countries operate in a legal sys-
tem subject to conventional civil and common law, which may not always
be compatible with the Shari’ah. Different legal environments from country
to country make the task of introducing new products very diffi cult and
costly. Countries wishing to develop Islamic capital markets need to review
the legal system as a whole and make serious efforts to ensure that the legal
framework complies with the Shari’ah. Countries should make coordinated
efforts to ensure that their legal systems are standardized and harmonized
in order to remove any ambiguity regarding the status of Islamic capital
market transactions undertaken in a particular jurisdiction.
Dispute Resolution In the countries in which Islamic capital markets are being
developed alongside conventional markets, the existence of different legal
systems for addressing issues with Islamic instruments is not an ideal situ-
ation. In order to minimize any confusion, amendments should be made to
accommodate Islamic instruments within the framework of existing dispute -
resolution procedures, rather than setting up a separate, dedicated system.
The approach to dispute resolution should aim to avoid duplication of
resources and maintain the confi dence in Islamic products.
Strengthening the Regulatory Framework While rules exist in a number of mar-
kets, the enforcement of them is often weak. The regulatory authorities
should play a more active role in the development of capital markets by
strengthening the regulatory framework and by establishing the credibility of
the regulatory institutions. In many Islamic countries, regulatory institutions
either do not exist or are very weak. Having independent regulatory and
supporting institutions will serve to further promote and strengthen Islamic
capital markets.
Market Structure and Practices
Capital markets in several Muslim countries do not have a good reputation
among foreign investors. This low level of confi dence stems from a number
of practices that leave investors vulnerable to market abuses such as price
manipulation, front running, insider trading, and blank selling. Regulators
should take steps to restore the credibility of the markets and to ensure that
the trading of securities takes place in a transparent fashion.
Further, the operation of markets should be reviewed with a view to com-
plying with Shari’ah requirements. For example, the practice of short sell-
ing and maintaining margin accounts is not considered acceptable by some
Shari’ah scholars. A system - wide procedure should be established to stan-
dardize these practices. In order to encourage foreign borrowers and to gain
access to liquid markets in other Muslim countries, regulators should promote