The Shariah compliance challenge in Islamic bond markets

摘要

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.