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Islamic Securities Exchanges: Principles and International Developments

Islamic Securities Exchanges: Principles and International Developments

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therefore, to conclude that the emerging Islamic finance system and its development is a

natural response to these religious-based constraints. Islamic finance is a form of

finance based on Islamic legal concepts and principles. These Islamic principles

derive from both primary and secondary Islamic Shari’a sources.2 According to

Islamic Shari’a, financing transactions that are Shari’a-compliant should not involve

interest (being a form of riba), gharar (that is, speculation), or financing of any

forbidden activities. In addition, Islamic financing transactions should be structured on

a risk-sharing basis. These principles apply to all sectors of the financial system,

including capital markets, banking, and insurance.

22.02 Recently, there has been an emerging trend towards the facilitation of Islamic finance in

non-Islamic countries and its development in Islamic countries. In the UK, for example,

certain legislative changes have been introduced to facilitate Islamic finance

transactions and its regulation. Also, following the Arab Spring, there have been calls

to develop and enhance Islamic finance in certain countries such as Egypt, Libya, and

Tunisia. During the global financial crisis, Islamic finance has been promoted as

offering at least a partial solution to the causes of the financial crisis and as an

alternative model that offers a ‘crisis-free’ sustainable financial system. It is a truism,

however, that certain Islamic finance products (such as Sukuk) were not really immune

from the implications of the global financial crisis. Nevertheless, many conventional

financial institutions and governments have developed an interest in Islamic finance in

recent years. Promoting Islamic finance in a certain country and offering Islamic

finance products will attract alternative sources of funds and tap the Islamic finance


22.03 Along the spectrum, however, the recognition of Islamic finance in Islamic countries

has varied.3 At one end, a few Islamic countries have converted their financial systems

into Islamic ones.4 Other Islamic countries have developed a dual approach whereby

Islamic financial systems function alongside conventional financial systems.5 At the

other end of the spectrum, some Islamic countries have been conservative towards the

adoption of Islamic finance as an independent separate system.6

22.04 Capital markets products that are Shari’a-compliant are more common in Islamic

countries that maintain an advanced Islamic financial system (such as Malaysia).

However, such products have become popular in other Islamic countries and even in

non-Islamic countries. In this chapter, we aim to explain briefly the principles of

Islamic finance and their implications on capital market products such as Sukuk. The

chapter also provides a brief review of the stock exchanges in selected Islamic

countries and other non-Islamic countries, such as Thailand, highlighting the position of

Islamic finance/securities.

Principles of Islamic finance

22.05 The basis of conventional financial systems has been viewed as non-Islamic.7 One of

the most crucial principles in Islamic finance is that it does not recognize the trade of

money as a subject matter of trade.8 Usmani explains:

[under Islam] money has no intrinsic utility; it is only a medium of exchange;

each unit of money is 100 per cent equal to another unit of the same

denomination; therefore, there is no room for making profit through the

exchange of these units inter se. Profit is generated when something having

intrinsic utility is sold for money or when different currencies are exchanged,

one for another.9

22.06 Hence, Islam approves, inter alia, financing when it is an asset-based financing.10 In

other words, Islamic finance is based on ‘money for assets’ rather than ‘money for

money’.11 There must be an underlying asset as the subject matter of the financing

contract.12 Unlike conventional finance, however, the term ‘asset’ under Islamic finance

principles does not have a broad meaning. Strictly speaking, for example, receivables

in the conventional sense are not considered to be an ‘asset’ under Islamic finance


22.07 Since Shari’a prohibits the trade of money, any interest-bearing loans are prohibited as

a form of riba. Riba is one of the most controversial issues in the Islamic world.13 It is

an Arabic word meaning, literally, ‘increase’14 and generally signifies ‘any unjustified

increase of capital for which no compensation is given’.15 Charging of interest in

conventional financing transactions is considered to be a form of riba and therefore is

prohibited under the Islamic Shari’a.

22.08 The Quran refers expressly to only one form of riba; it does not further define riba or

its forms.16 The type of riba that has been referred to expressly in the Quran is a preIslamic practice—the so-called ‘pay or increase’.17 In this form of riba, creditors used

to double the principal upon default by the debtors in return for an extension of the

repayment period.18 This form of riba includes charging the debtor any amount as a

penalty for failure to pay on time.19 The Sunna reaffirms the prohibition of riba. Thus

the Prophet stated that ‘every loan that attracts a benefit is riba’.20 Therefore interest

charged on loans is considered to be a benefit and is banned under Shari’a. This

conclusion is universally accepted among Islamic scholars.21

22.09 Another principle under Shari’a is that any financial gain without effort or liability is

prohibited.22 Islamic law is not against financial gains or profits as long as an effort is

performed or a partial liability is accepted.23 This ‘risk-bearing’ concept of Islamic

finance applies to both labour and capital.24 Thus Shari’a does not allow payment for

labour unless an effort is performed and it does not allow any reward for capital unless

it is exposed to business risks.25 In this sense, Islamic financing transactions should be

based on a ‘risk-sharing’ basis between the financier and the ‘borrower’.26

22.10 In addition, a well-established principle of Islamic finance is the prohibition of gharar.

Gharar has no precise meaning and Islamic jurists have differed on its definition.27

Literally, gharar means ‘fraud’,28 but in transactions the word gharar is normally used

to mean risk, uncertainty, hazard,29 and speculation.30 Hence, because of the prohibition

of gharar, Islamic law prohibits any transaction that involve unjustified enrichment

through pure chance31 and any transaction that involves elements of speculation.32 Also,

because of the prohibition of gharar, Islamic law considers a contract of sale invalid

where there is uncertainty regarding the object of the sale or its price. Thus gharar

‘includes both ignorance of the material attributes of the subject-matter of a sale, and

also uncertainty regarding its availability and existence’.33 A classical example is the

sale of a fish in the sea.34

Islamic financing methods

22.11 Given the prohibitions imposed by the Islamic Shari’a, Islamic finance has emerged as

an alternative model to offer a functional equivalent system to conventional finance.

The purpose of an Islamic financial system is the provision of financing in accordance

with the principles of Islamic Shari’a. To achieve Shari’a compliance, Islamic banks

normally have a committee that comprises of Shari’a scholars, who oversee the

business or the products from a Shari’a perspective and ensure that it is in compliance

with the Shari’a. The Islamic finance model is based on several Islamic financing

methods, which include, inter alia, musharakah, mudarabah, murabahah, istisna, and


22.12 The musharakah and mudarabah are equity financing mechanisms. Arguably, these

methods are the original mechanisms for financing under Shari’a and upon which

Islamic financing transactions should be based.35 Musharakah, or ‘partnership

finance’, is an equity participation contractual relationship between the parties. Under

the musharakah, the financier and the borrower each contribute capital, and share both

the profits and the losses on the basis of their share in the capital and their effort. In

Islamic financing practice, musharakah structures are used for both short- and longterm financings.36

22.13 The mudarabah, or ‘trust financing’, is a partnership structure whereby the investment

comes from one partner (that is, the beneficial owner of the capital)37 and the

management is the exclusive responsibility of the other (that is, the mudarib, or

‘management trustee’).38 Under the mudarabah, the Islamic financier provides the

entire capital needed for the financing and shares in the profits with the borrower (that

is, the management trustee) at a predetermined ratio. However, losses are entirely

borne by the financier. In Islamic banking, Islamic banks use the ‘two-tier mudarabah’

to achieve financial intermediation in a Shari’a-compliant manner, which enables

Islamic banks to act as an intermediary between investors (depositors) and

entrepreneurs (borrowers).39

22.14 The two-tier mudarabah consists of two mudarabah arrangements: the unrestricted

mudarabah and the restricted mudarabah. The Islamic bank enters into an unrestricted

mudarabah with its depositor whereby the depositor provides the capital and the bank

acts as a ‘management trustee’, enjoying a complete and unrestricted freedom in using

the funds. Then, the bank enters into a restricted mudarabah contract with the

entrepreneur (that is, the borrower). Here, the bank is acting as a ‘capital provider’ and

the entrepreneur is the ‘management trustee’. The contract is restricted because the bank

agrees to finance a specific project carried out by a specific entrepreneur.40

22.15 Unlike musharakah and mudarabah, there are other financing methods that are not, in

essence, financing mechanisms under the Islamic Shari’a. These financing methods,

however, have been structurally used in Islamic financing transactions in order to

provide financing in a Shari’a- compliant manner—namely, murabahah, istisna, and

ijarah. These financing methods have been used to achieve an economic equivalent of

the conventional debt financings.

22.16 Murabahah, or ‘cost plus financing’,41 is a sale contract in essence.42 Under the

murabahah structure, the financier purchases the assets and then on-sells such assets to

the client at a price that includes the financer’s profit. The client pays for the assets in

installments over an agreed period of time. Once the assets are sold by the financier to

the client on an installment basis, a creditor–debtor relationship is created. A variation

of the murabahah financing is the tawarruq, or ‘reverse murabahah’. The tawarruq

facility enables Shari’a-compliant funding for customers who require an advancement

of cash rather than purchasing certain assets.

22.17 In construction or manufacturing projects, the concept of istisna, or ‘commissioned

manufacturing’, may be used.43 Istisna is a ‘kind of sale where there is a transaction in

respect of a commodity before it comes into existence. Its effect is to require a

manufacturer to produce a specific commodity for the purchaser’.44 In certain

construction projects that are financed by Islamic banks, the transaction is structured on

the basis of a ‘back-to-back istisna’,45 which involves two istisna arrangements. The

first arrangement is between the Islamic bank and the manufacturer, whereby the bank

acts as the buyer of the manufactured assets; the second arrangement is between the

client and the Islamic bank, whereby the bank acts as the seller for the manufactured


22.18 Another structure that is commonly used by Islamic banks is the ijarah, which is

normally referred to as ‘lease financing’.46 Under an ijarah financing arrangement, the

Islamic financier purchases an asset and leases it to the client. Unlike conventional

leasing provided by conventional financiers, under the ijarah structure, the ownership

risks that are associated with the asset are borne by the Islamic financier. Some

structures involve a lease purchase arrangement, or ijarah wa iqitina.47 Under this

structure, a lessee will be able to purchase the leased asset at the end of the lease


Islamic insurance (takaful)

22.19 One of the main objections to the business of insurance under Islamic Shari’a is that

insurance violates the gharar (uncertainty) principle.48 This is because the benefits of

the insurance contracts depend on future events that are unknown at the time of signing

the agreement.49 Thus the insured is uncertain as to whether the payment will be paid as

promised, how much is going to be paid, or when it is going to be paid.50 Another

objection to the insurance business is that insurance companies invest their premiums in

interest-based investments.51 Hence insurance companies’ investments are riba-based

and contravene Islamic Shari’a.52 In the light of this, an Islamic form of insurance

known as takaful has been developed.

22.20 Takaful, which means ‘guaranteeing each other’,53 is a concept based on social

solidarity, mutual assistance, and cooperation.54 Takaful is cooperative in the sense

that all participants are both the insured and the insurers themselves.55 Thus, under

takaful, policyholders pay a periodic contribution in a collective pool and agree that,

in the event of a covered loss, each policyholder will make a proportionate gift from

his or her account to cover the loss.56 Also, policyholders’ contributions are invested

in a manner compatible with the Islamic Shari’a. Under takaful, there is no agency

relationship between the insurer and the insured.57 The takaful contract is based on the

concept of tabarru (that is, ‘to donate or contribute’).58 Under this arrangement,

policyholders agree to pay a contribution to a common pool out of which compensation

is paid.59

Islamic securities

22.21 The gradual development of Islamic finance has necessitated further innovation and

developing Shari’a-compliant financial products in other sectors of the financial

industry, such as capital market products. For example, one of the most remarkable

innovations in Islamic finance is the development of Islamic bonds, or Sukuk.60 Equity

investments have also witnessed a remarkable change with the development of Islamic

finance. Although investment in shares has been viewed as Shari’a-compliant, the

development of Islamic finance has introduced new concepts in equity investments,

such as the ‘screening process’ and purification.

Islamic bonds (Sukuk)

22.22 Conventional bonds are interest-bearing instruments and accordingly such instruments

fail to comply with the principles of Islamic Shari’a. This means that Islamic

enterprises will not be able to issue conventional bonds and any investor who would

like to invest in a Shari’a-compliant manner will not be able to invest in these interestbearing bonds. Sukuk offer an alternative way in which Islamic enterprises can raise

funds in a Shari’a-compliant manner. Sukuk (plural of sak), are defined by the Islamic

Financial Services Board (IFSB) as:

certificates with each sak representing a proportional undivided ownership

right in tangible assets, or a pool of predominantly tangible assets, or a

business venture (such as a mudarabah). These assets may be in a specific

project or investment activity in accordance with Shari’a rules and


Sukuk are also known as ‘Islamic bonds’ and they are sometimes referred to as

‘Islamic securitizations’. The Accounting and Auditing Organization for the Islamic

Financial Institutions (AAOIFI) refers to Sukuk as ‘investment Sukuk’ to distinguish

them from shares and bonds. However, as a result of the use of trusts in international

Sukuk transactions, they are normally referred to as ‘trust certificates’.

22.23 Sukuk, however, should be distinguished from conventional bonds. While conventional

bonds, from a legal perspective, create a creditor–debtor relationship, Sukuk represent

an ownership stake in an existing asset.62 Sukuk can be structured on the basis of any of

the foregoing Islamic finance methods. Generally speaking, the common attributes of an

international Sukuk transaction63 are as follows.

(a) An entity that would like to raise funds in a Shari’a-compliant manner will sell a

specific asset to a special purpose vehicle (SPV), or it will enter into a mudarabah

or a musharkah with the SPV.

(b) The SPV will issue the Sukuk and it will pay the proceeds generated from the

issuance of the Sukuk to the entity in return for the asset that it will purchase, or as a

contribution under the mudarabah or the musharkah (as the case may be).

(c) The SPV (having purchased the assets from the entity or having entered into a

mudarabah or a musharkah with the entity) will declare a trust over the assets, the

mudarabah or the musharkah, in favour of the Sukuk holders. The declaration of

the trust will grant the Sukuk holders a beneficial ownership in the underlying

assets, which, from a Shari’a perspective, justifies any returns payable under the

Sukuk (the equivalent to interest).

(d) At the maturity of the Sukuk, the entity will purchase back the assets and pay back

the principal, or, in the case of the mudarabah or the musharkah, such

arrangements will be liquidated with the view that the principal will be repaid to

the Sukuk holders.

Islamic equity

22.24 Equity represents risk capital in conventional finance and has the same concept of risksharing under Islamic finance law. For this reason, it has been argued that Islamic

jurists were prepared to accept existing equity market models instead of develop

Islamic ones.64 Ideologically, Islamic law encourages, and is in favour of, equity

financing. Islamic jurists therefore hold the view that the ownership and trading of

common stock is permissible.65 However, with the development of Islamic finance,

screening criteria have been developed as a yardstick for permissible Islamiccompliant stock investments. These criteria, although arbitrary,66 have received

recognition by many Islamic jurists and are being implemented by Islamic stock


22.25 Screening is a developed practice that serves as a benchmark in including or excluding

publicly traded securities from investment portfolios based on the principles of Islamic

Shari’a.67 In equity investments, the screening process can be divided into qualitative

and quantitative criteria.68 The qualitative criterion involves mentoring the activities of

the investment to ensure its compatibility with the Islamic Shari’a. Thus the activities

of the company that has issued the stock must be permissible and Islamic-compliant.69

This means that companies involved in non-Islamic business activities, such as the

distribution of alcoholic beverages, would fail to meet the qualitative criterion.

22.26 The second screening criterion is the quantitative criterion, which is a set of financial

ratio filters. These financial ratios involve a precise measurement of the underlying

investment accounts to ensure that they are Shari’a-compliant.70 Because Islamic

Shari’a prohibits riba, the quantitative criterion involves examining the underlying

investment accounts to ensure that the proportion of the investee company’s income that

derived from interest is minimal. In addition, because of the Islamic prohibition of

interest-bearing debts, the criterion also examines the debt-to-equity finance of the

underlying investment to ensure that the debt proportion is at acceptable levels.

22.27 The conceptual development of the Islamic Shari’a screening led to the growth of the

Islamic investment funds industry.71 Several index providers have launched Shari’acompliant indexes, such as the Bursa Malaysia Shari’a Index, Dow Jones Islamic

Market Indexes, and S&P Shari’a Index. Each index provider will have its own

Shari’a screening methodology. For example, Dow Jones’s screening methodology

include that the following financial ratios must be less than 33 per cent in order for a

listed company to be included on its index:72

(a) the total debt divided by trailing twelve-month average market capitalization;

(b) the sum of company’s cash and interest-bearing securities divided by the trailing

twelve-month average market capitalization; and

(c) accounts receivable divided by the trailing twelve-month average market


Country analysis

National stock exchanges

22.28 The common features of most emerging markets are that they tend to be ‘bank-centric’,

with underdeveloped equity and bond markets.73 In many of the Islamic jurisdictions,

stock markets still play no more than a marginal role in contributing towards economic

development. Also, debt markets have been slow to emerge.74 Recently, however,

financial markets have been receiving more attention in Islamic countries. Islamic

countries have realized the importance of finance in economic development and, as a

result, certain reforms are being undertaken to improve their financial systems,

including stock exchanges. Stock exchanges in Islamic countries are therefore

developing to take a bigger role in their respective countries.

22.29 As mentioned earlier,75 the attitude of Islamic countries towards Islamic finance has

varied. While certain countries, such as Malaysia, have adopted a clear policy in

promoting Islamic finance, including Islamic securities, other countries have not

followed the same path. Thus securities exchanges in Islamic jurisdictions are not

necessarily structured on Islamic finance principles. The following is a review of stock

exchanges in selected Islamic countries, as well as non-Islamic countries, which are

witnessing a development in Islamic finance.

The Kingdom of Saudi Arabia

22.30 The development of both debt and equity securities markets have always been at the top

of the Saudi agenda. A common theme in the development plans76 issued by the Saudi

Ministry of Economy and Planning (MEP) is the strengthening of the domestic

securities markets, as well as enhancing the effectiveness of the domestic policies in

order to facilitate financial services in the Kingdom of Saudi Arabia. Historically, the

Saudi debt securities market has not been very well developed. For example,

conventional bonds issuances are not available as a source of corporate financing.77 It

can be argued that the slow development of debt securities market in Saudi Arabia is

partially because of religious sensibilities.78 Saudi Arabia has always applied Shari’a

as the paramount legal system. This may have affected the development of debt

financing in Saudi Arabia as a result of the prohibition of riba. Although conventional

bonds issuances have witnessed slow development in Saudi Arabia, there has been an

increasing interest in Islamic Sukuk.

22.31 Prior to 2003, Saudi Arabia had no official exchange, but the central bank of Saudi

Arabia sponsored a sophisticated computer-based stock trading system.79 However, in

2003, Saudi Arabia promulgated the Capital Market Law (CML),80 which has been

described as the ‘big bang’ of Saudi finance.81 The CML establishes an official market

for trading in securities—namely, the Saudi Stock Exchange, a joint-stock company, as

the sole entity authorized to operate a market for the trading in securities in Saudi

Arabia.82 The objectives of the Exchange are to ensure fair, efficient, and transparent

listing requirements,83 to provide reliable and rapid settlement procedures through its

Securities Depositary Centre,84 to establish and enforce professional standards for

brokers and their agents,85 and to ensure the financial strength and soundness of the

brokers.86 The CML also deals with matters related to the regulation of broker

activities, disclosure, and insider dealing.

22.32 Also, one of the main features of the CML was to create a capital market authority to

regulate the securities sector. The CML established the Capital Market Authority

(CMA),87 which is responsible for issuing rules and for implementing the provisions of

the CML.88 The CMA’s main task is to act as the regulatory authority over activities

concerning the issuance and trading in securities.89 The CMA is also responsible for

developing procedures to reduce the risks related to securities transactions,90 for

protecting investors and citizens from unfair and unsound practices,91 for achieving

fairness, efficiency, and transparency in securities transactions, and for regulating and

monitoring the full disclosure of information regarding securities.92

22.33 The CML defines securities to include, inter alia:93 convertible and negotiable shares

of companies and bonds; and other negotiable instruments of debt issued by companies,

the government, public institutions, or public organizations. The CML does not,

however, specifically address Islamic securities. The lack of a regulatory framework

that specifically covers Islamic finance, including Islamic securities, has not prevented

Islamic securities issuances in the Kingdom of Saudi Arabia. Recently, the Saudi

securities market has been witnessing an increase in Sukuk issuances, as well as the

issuance of sovereign Sukuk. In early 2012, the Saudi General Authority for Civil

Aviation (GACA) has sold US$ 4 billion Sukuk domestically. This is expected to

trigger more fund-raising by Saudi sovereign entities.

22.34 The Ninth Saudi Development Plan94 has recognized the need for a regulatory

framework for the Sukuk, and has identified some regulatory and technical obstacles

that need to be addressed, including developing new regulations and legislations that

govern the issuance of Sukuk and listing such instruments on the Exchange, and

establishing a secondary market for trading in Sukuk.

The United Arab Emirates

22.35 The United Arab Emirates (UAE) is one of the countries that have young stock

exchanges. Prior to 1999, informal trading was conducted by brokers located in Dubai

and Abu Dhabi.95 In 2000, however, two main official stock exchanges were

established in the UAE—namely, the Abu Dhabi Securities Exchange (ADX)96

(formerly the Abu Dhabi Securities Market), and the Dubai Financial Market (DFM).97

The ADX has also opened branches in three other Emirates. Both the ADX and the

DFM are incorporated as independent legal entities, providing an opportunity to invest

in securities in a manner that benefits the national economy. The ADX and the DFM are

both regulated by the Securities and Commodities Authority (SCA),98 established by

virtue of Federal Law No 4 of 2000.99 The SCA’s main duty is to improve the

efficiency of the financial market, to regulate and monitor the licensing of securities in

the market, and to protect investors from unfair and incorrect practices.

22.36 However, the UAE has officially recognized Islamic finance, including Islamic bonds.

Thus the Federal Law No 6 of 1985100 was enacted to govern and supervise Islamic

banks. In line with this policy (that is, recognizing Islamic finance activities), the SCA

promulgated the Resolution Concerning the Listing of Islamic Bonds.101 The Resolution

defines Islamic bonds as ‘Any bonds issued in accordance with Shari’a principles and

offered through a Public Subscription’.102 The Resolution sets out a number of

conditions that Islamic bonds should fulfill, including being approved by a Shari’a


22.37 In addition to the DFM and the ADX, an international exchange was established in

Dubai, on 26 September 2005—namely, Nasdaq Dubai (formerly the Dubai

International Financial Exchange). Nasdaq Dubai is located in the Dubai International

Financial Centre (DIFC),104 which is an on-shore financial free zone opened for

business in 2004. Nasdaq Dubai aims to provide issuers with a trading exchange in

their own region that meets the standards of international exchanges, but also to give

them a unique access to regional and international capital. Accordingly, the

establishment of Nasdaq Dubai involved introducing various laws that are modelled on

the laws and practices found in other leading international financial centres, such as

London and New York. Nasdaq Dubai currently admits equities, derivatives, structured

products, Sukuk, and conventional bonds for trading. On 11 July 2010, Nasdaq Dubai

outsourced its trading, settlement, clearing, and custody functions for equities to the

DFM. However, Nasdaq Dubai continues to be regulated by the Dubai Financial

Services Authority (DFSA). The move towards the consolidation with the DFM aims to

increase the liquidity and to strengthen Dubai as a capital market hub.

22.38 The creation of the DIFC has required the enactment of special and unique legal and

regulatory frameworks. To this effect, various laws have been passed at both levels—

that is, laws forming a viable legal infrastructure combined with a ‘second level’ of

financial regulation and supervision. In establishing the DIFC, Islamic finance has not

been overlooked, being a growing industry regionally and internationally. At the

regulatory level, for example, the DFSA Rulebook addresses Islamic finance and

creates a regulatory framework for conducting Islamic finance business in or from the


The State of Qatar

22.39 The Qatar Exchange (formerly the Doha Securities Market) is the principal stock

market of Qatar. The Qatar Exchange was established by virtue of the Doha Securities

Market Establishment Law (DSM Law),105 and began its activities on 26 May 1997.

The establishment of the Qatar Exchange aims to promote foreign and domestic

investments in Qatar, and to encourage the diversification of the economy. Currently,

there are forty-two companies listed on the Qatar Exchange. The Qatar Exchange has

recently introduced a number of new equity indices to supplement the existing Qatar

Exchange index.

22.40 Qatar has a policy of expanding its financial services sector through the establishment

of the Qatar Financial Centre, which was set up by the government of Qatar in 2005.

Also, the Qatari market is open to Islamic, as well as conventional, banks. Until

recently, conventional banks were permitted to offer Islamic finance products.

However, the Qatar Central Bank (QCB) has recently notified conventional banks

running Islamic financing activities in Qatar that, inter alia, they should refrain from

opening new Islamic branches and from granting new Islamic finance operations. This

policy shift aims to prevent an overlap between the non-Islamic and Islamic activities

of conventional banks. Generally, however, the Qatari government has been supportive

of Islamic securities. Thus the government is involved in the issuance of sovereign

Islamic Sukuk.

The Hashemite Kingdom of Jordan

22.41 Securities exchanges in Jordan took place in the Amman Financial Market, which had

existed since 1978. However, the 2002 Securities Law,106 which was introduced as

part of Jordanian economic-related reforms, established the Amman Stock Exchange

(ASE) in 1999.107 The ASE aims to provide a strong and secure environment for

securities exchanges, while protecting and guaranteeing the rights of the investors. It is

regulated by the Jordanian Securities Commission (JSC), which is an autonomous legal

entity main tasked with protecting investors in securities, with regulating and

developing the capital market, and with protecting the capital market from risks that

might face it.

22.42 The Securities Law does not address Islamic securities, but earlier efforts had been

undertaken by the Jordanian government in facilitating the issuance of Islamic bonds

through the enactment of the Muqaradah Bonds Act in 1981.108 In accordance with

Shari’a principles, under the Muqaradah Act, bond holders are not entitled to claim

interest yields or prefixed interest on their bonds.109 In addition, the Jordanian Banking

Law110 addresses the business of Islamic banks and allows Islamic banks to issue

muqaradah bonds.111 However, the enactment of the Muqaradah Act occurred long

before the recent developments in the Islamic securities market and the emerging Sukuk


22.43 Recently, the Jordanian government has submitted to the Jordanian Parliament a draft

Law that governs the issuance of Sukuk in Jordan. Pursuant to art 8(a) of the draft

Sukuk Law, the Muqaradah Act would be repealed. The aim of the draft Sukuk Law is

to allow Jordan to tap the Sukuk market, and to facilitate the issuance of Sukuk by

sovereign and/or private entities. The draft Sukuk Law provides for the establishment

of a Shari’a committee consisting of seven Shari’a scholars. The Shari’a committee

will have the authority to provide its Shari’a opinion in relation to any proposed

Sukuk. As of time of writing (March 2012), the draft Sukuk Law remains under review

by the Jordanian Parliament.


22.44 The Islamic banking and finance industry in Malaysia started out with the inception of

the Pilgrims Fund Board in 1963. This is designed for Muslims who plans to perform

hajj deposits with the Fund until it reaches a certain amount that qualifies them for their

mission. These deposits are Shari’a-compliant in that it does not contain elements that

are prohibited by Shari’a.

22.45 In 1981, the government of Malaysia established a National Steering Committee to

implement Islamic banking and finance in Malaysia. The Islamic Banking Act was

passed by the Malaysian Parliament and came into effect in 1983. With the passing of

the legislation, interested parties were able to apply for a fully fledged Islamic banking

licence and operate strictly as an Islamic bank.

22.46 The passing of the Islamic Banking Act also marked the establishment of the first

Islamic bank in Malaysia, Bank Islam Malaysia Berhad, which was a significant

indicator of Malaysia’s enthusiasm to become a leading Islamic banking and finance

industry hub in the world. Legislation on takaful, or Islamic insurance, was later

passed by the Parliament in 1984.112

22.47 In 1983, the Government Investment Act was passed to allow the government to issue

government investment certificates (GICs) that are Shari’a-compliant and enable

Islamic banks to meet their liquidity requirements, as well as act as an instrument to

absorb idle funds in the short run.

22.48 As a country that practises common law as part of its legal system, its central bank,

Bank Negara Malaysia (BNM), has formed the Law Harmonization Committee (LHC)

to review the existing common law legislations, with the intention of absorbing Shari’a

principles and removing impediments to the efficiency of the Islamic financial system.

The LHC was established in July 2010 to create a conducive legal system that

facilitates and supports the development of Islamic banking and finance industry, to

achieve certainty and enforceability in the Malaysian laws in regard to Islamic finance

contracts, to position Malaysia as the reference law for international Islamic finance

transactions, and to position Malaysian laws as the law of choice and Malaysia as the

forum for the settlement of disputes relating to cross-border Islamic financial

transactions. The LHC comprised members from among key government stakeholders,

including the Attorney General’s Chambers, as well as industry players and

experienced Islamic finance legal practitioners.113

22.49 As a result of the strong encouragement and support of the government, Malaysia has

responded fairly well to the tax reforms required to accommodate Islamic financial

instruments within the country’s existing financial and legal framework. It has issued

legislations providing incentives in the form of stamp duty exemptions for additional

instruments in Shari’a-compliant financing schemes, deductions for expenditure

incurred on them and in issuing Islamic securities, and tax exemptions on the resulting

assets and profits similar to provisions on interest gained from conventional


22.50 The BNM’s Act, the Central Bank of Malaysia Act 1958, was significantly amended to

place the National Shari’a Advisory Council (NSAC) of the BNM as the sole authority

for Islamic banking, finance, and takaful matters under the purview of BNM. The

amendment was intended to emphasize the NSAC as the reference point for courts and

arbitrators for disputes involving Islamic commercial matters. The importance of the

NSAC’s role was also introduced and absorbed within the framework of the Securities

Commission and the Labuan Financial Services Authority (Labuan FSA).115

22.51 In 2008, the International Shari’a Research Academy for Islamic Finance (ISRA) was

founded to enhance literature and research on Shari’a and fiqh ul mumalat. ISRA

provides an international platform to encourage discourse among Shari’a scholars,

academicians, regulators, and practitioners. To date, ISRA has organized many

programmes and published various literatures on the Islamic banking and finance


22.52 Malaysia is fast becoming recognized as the model for the successful development and

establishment of an Islamic banking and finance system alongside conventional banking

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Islamic Securities Exchanges: Principles and International Developments

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