374 AN INTRODUCTION TO ISLAMIC FINANCE
programs and promote greater adoption of its standards at the national
level. The IIFM should focus on market practices and contract stand-
ards and strengthen its role as an association of market players. The
LMC can play a role in promoting national and regional strategy for
money - market development. The IIRA can play an important role in
enhancing disclosure and transparency.Compared with the conventional system, the current form of Islamic
fi nance offers very limited functionality. Table 17.3 provides a functional
assessment of Islamic fi nancial markets as they exist today.
The design of fi nancial infrastructure and architecture to promote
Islamic fi nance is a challenge and demands serious commitment from stake-
holders. Some of these challenges are discussed below.
TABLE 17.3 Functional assessments of Islamic fi nancial markets
Function Assessment
Capital
mobilization
Limited set of instruments; concentration in short - term
maturities; low depth and breadth of markets; and lack
of liquidity.Managing risk No derivative markets or organized mechanism for risk
mitigation. High geographic and sector concentration.
Limited diversifi cation opportunities.
Pooling and diverse
ownership
No or limited stock markets in Islamic countries. Where
they do exist, they are illiquid and poorly supervised,
offering limited opportunities for the pooling and
diversity of ownership. In non - Islamic countries, limited
Shari’ah - compliant stocks available to Islamic investors.Effi cient contracting Lack of civil and commercial law based on Islamic law
in several Islamic countries where the legal system is
predominantly conventional limits effi cient contracting.
In non - Islamic countries, it may not be possible to
replicate Shari’ah law in its intended form, which
hinders effi cient contracting.
Transparency and
price discovery
Illiquid, shallow, and poorly supervised capital markets
inhibit the process of price discovery and limit
opportunities for arbitrage.Governance and
control
Not all stakeholders participate in the governance of
fi nancial institutions offering Islamic fi nancial services.
Lack of transparency in governance of Shari’ah boards.Operational
effi ciency
High perception of operational risk resulting from a lack
of proper accounting standards, clearing and settlement
processes, and training personnel.Source: Adapted for Islamic fi nancial markets based on Ul - Haque (2002).