چالش پیروی از قوانین شریعت در بازار اوراق قرضه اسلامی

This paper considers the interaction between Shariah advisors, regulators, Shariah conscious ethical investors and an Islamic bond issuing firm. The model shows that due to higher Islamic instrument cost, the Islamic bond industry's existence is contingent upon a Shariah conscious ethical investor base that can absorb the lower Shariah premium. The results also suggest that competition amongst Shariah advisors along with issuer fatwa shopping results in non-compliant (or less than fully compliant) Islamic financial instruments. This study contributes to Islamic finance theory by suggesting that apart from market incentives and stronger regulations, the Shariah compliance challenge is dependent on Shariah conscious ethical investors.

The Islamic finance industry has experienced rapid growth in the last decade and is expected to reach $1.8 trillion by 2013 (Nazim and Bennie, 2012). The concept of ‘Shariah compliance’ that defines and distinguishes the Islamic finance industry might also threaten its very existence. A stark reminder of this risk is the impact of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) February 2008 announcement regarding the illicit Shariah practices in the Islamic bond markets and the consequent decline in the demand for Sukuk3 (Naim et al., 2013). This paper argues that the higher costs associated with Shariah compliance makes non-compliance an inherent risk in a system involving profit maximizing issuing firms. The problem becomes all the more complex with the possibility of fatwa shopping,4 where the issuing firm can move away from the ethical advisor enabling them to issue less Shariah compliant but more profitable or low risk structures (Hegazy, 2005). The problem is much more severe in the bond market where the Shariah standards are lax and the Shariah advisors can be hired on a one-off basis. This paper argues that the presence of regulations and ‘whistle blowing’ by Shariah standard setting bodies should help to neutralize the moral hazard concern to some extent. A higher level of Shariah compliance, however, is only possible when one of the three parties (the issuing firm, advisor or investor) becomes more Shariah conscious. The focus here is on the investor to show that a higher preference for Shariah compliance can result in an equilibrium where it becomes optimal for the firm to issue Shariah compliant products. The results can be easily extended to show that similar equilibrium will be reached in the presence of a Shariah conscious firm. The paper first builds a firm focused model and shows that due to higher Islamic instrument costs, the industry's existence is contingent upon a Shariah conscious ethical investor base that can absorb the lower Shariah premium. ‘Fatwa’ shopping is then incorporated to address the Shariah non-compliance problem. The model suggests that competition amongst Shariah advisors along with issuer's fatwa shopping results in non-compliant (or least compliant) Islamic financial instruments. These moral hazards are then partly neutralized by incorporating regulators in the model. Finally, Shariah conscious ethical investors complete the model by showing that high level of investor's aversion for non-compliance could result in an equilibrium situation where the firm's incentive for Shariah compliance exceeds that of non-compliance. Previous Islamic finance studies have focussed more on the role played by Islamic financial institutions and their instrument structures and have not really addressed Shariah non-compliance and why it is an inherent feature of Islamic finance. This paper contributes to the Islamic finance theory by developing a model based on the work of Leland and Pyle (1977), Ueda (2004) and Bolton et al. (2012). The model captures the conflict between a profit maximizing firm, competing Shariah advisors by permitting fatwa shopping, an imperfect regulator and a Shariah conscious investor. Our findings have implications for policymakers–regulators, Shariah boards, and investors. They suggest that the Shariah compliance challenge is not just dependent on the ethical nature of the firm or its' Shariah board but should also be addressed by the introduction of a proper mix of stronger regulations and by the development of more highly Shariah conscious investor base. The latter could perhaps be achieved through more education and enhancing investor awareness. The remainder of the paper is organized as follows. Section 2 discusses some of the unique Islamic finance features that contribute towards their higher costs as compared to conventional finance. The relevant literature is examined in Section 3. The model is developed in Section 4 and the conclusions provided in Section 5.

This paper has considered the lack of Shariah compliance in the Islamic finance industry by examining the role of different market participants including the Islamic bond issuing firms, Shariah advisors, regulators and Shariah conscious investors. It did so through the development of a basic firm specific model which was subsequently modified to reflect market practice. Our findings help explain some specific factors that can be adjusted to encourage further issuance, and hence development of Shariah approved Sukuk. It is suggested that the Shariah compliance challenge emanates from the firm's profit maximizing nature and the higher costs associated with Islamic financial instruments. The results imply that Shariah advisor's ability to neutralize non-Shariah compliance dilutes significantly in the presence of the firm's ability to fatwa shop. Competition amongst Shariah advisors and the fact their fee is paid by the issuing firm increases their tendency to approve less Shariah compliant structures. The paper suggests that regulation can partly overcome these tendencies. In some jurisdictions the regulator needs to approve Sukuk before their issuance. This can reduce the moral hazard that may be present with ‘fatwa’ shopping. Nevertheless it requires Shariah conscious investors and their market discipline to ensure an appropriate outcome These results advocate a better disclosure of instrument specific information so that others can equally judge the quality of the firm advisors rulings. Better education and understanding on the part of local investors is also needed to ensure that what might otherwise be called market discipline helps create a fully Shariah compliant Islamic financial industry.