Issues and Challenges 373
associations of market players for self - regulation and industry promotion
such as the International Capital Markets Association.
Sundararajan (2006), Marston and Sundararajan (2006), and IDB/IFSB
(2006) provide a detailed discussion of the issues and the missing elements
in developing architecture and infrastructure for the Islamic fi nancial indus-
try, which we summarize below:
■ (^) While there are distinct differences in conventional and Islamic fi nancial
systems, signifi cant elements of conventional infrastructure are equally
applicable and accessible to Islamic fi nance. Therefore, there is no need
to duplicate components of infrastructure that can be shared with
some adjustments to accommodate specifi c operational requirements
of Islamic fi nance.
■ (^) Financial architecture should be aligned with a vision for the industry,
and it should start with a detailed policy designed to address issues of
aligning fi nancial sector laws — such as insolvency laws — with Shari’ah
Law, strengthening the environment for risk sharing — that is, equity -
based fi nancial instruments and intermediation — and enhancing the cor-
porate governance of institutions offering Islamic products and services.
■ (^) At the national level, the fi nancial architecture for Islamic fi nance is
exposed to the same weaknesses as the conventional fi nancial sector
in many developing countries. Inadequate or non - existent legal frame-
works for regulation, weak observance of core principles (such as a lack
of independence, weak risk management, weaknesses in disclosure),
and ill - defi ned consolidated supervision affect both conventional and
Islamic banks. In addition, there is a need for special treatment of the
legal and institutional framework for the insolvency regime, investor
rights, creditor rights, securitization and judicial enforcement.
■ (^) As part of the systemic liquidity infrastructure, the micro - structure of
money and exchange and securities markets, payment settlement sys-
tems, and monetary and debt management operations are not yet well
adapted to accommodate and integrate Islamic fi nancial institutions
into the broader fi nancial system. These factors limit the development
of securities markets, which is critical for promoting product innova-
tions, risk management and effective supervision of Islamic fi nance gen-
erally. Shari’ah - compatible money and capital markets are essential for
the implementation of monetary and fi scal policies.
■ (^) There is a need for strengthening the international architecture of Islamic
fi nance, as there are still gaps and overlaps in the support structure pro-
vided by international infrastructure institutions. These institutions can
and should, therefore, play a key catalytic role in promoting the indus-
try at the national level. In this respect, the IFSB is expected to play the
leading role in setting standards and to coordinate with the Basel Com-
mittee on Banking Supervision (BCBS), the International Organization
of Securities Commissions (IOSCO), and the International Accounting
Standards Board (IASB). The AAOIFI should continue to realign work