ifferential existing between stock market returns and the rate of interest paid on a safe bond (U.S. Treasury bonds) over an extended period of time. Economic theory would assert that the differential should not exist. Capital should have left debt instruments and moved into equities until the rates equalized. Hence, the puzzle to be explained is: why does this high differential persist? Over the years, the study, originally using U.S. data, has been replicated in a number of coun - tries with the same results (Mehra 2003, 2006). The differential cannot be 48 Epistemological Foundation of Finance: Islamic and Conventional Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 explained by the existing theory of behavior under risk. Researchers have used varieties of utility functions and risk characteristics, but the puzzle remains largely unexplained. Similarly, there have been attempts to explain the low international risk-sharing puzzle, but formal modeling has not been fruitful. It is suspected that the reasons that explain low participation in the domestic equity market—and hence the emergence of the equity premium puzzle—are the same factors that could explain the low international risk-sharing puzzle. The prime candidates are the low level of trust, and a related factor, the cost of entering the market. Equity markets that are shallow also have limited participation. Empirical evidence (Erbas¸ and Mirakhor 2007; Guiso, Sapienza, and Zingales 2005) sug - gests one reason for low participation of the population in the stock market is the fact that people generally do not trust stock markets. The low level of trust, in turn, is explained by institutional factors and education. Moreover, high transac - tion costs—especially information and search costs, as well as the high cost of contract enforcement—are crucial factors inhibiting stock market participation. These factors also stem from the institutional framework in the economy (rules of behavior). Stiglitz (1989) suggests that disadvantages of equity finance stem from two informational problems: • An adverse signaling effect, which leads good companies not to issue as many equity shares for fear that it may signal poor quality; and • An adverse incentive effect problem, which suggests that equity finance weak - ens the incentive for the entrepreneurs to exert their maximum effort for the highest possible joint return. This happens because once the project is financed, the entrepreneur knows that net returns must be shared with the financier and therefore may not be moti - vated to work as hard as when the returns would not have to be shared. While the idea has intuitive appeal, empirical evidence does not support it. Allen and Gale (2007), on the other hand, suggest a more plausible and empirically stronger reason why stock market participation is limited. They argue that it is because of the costs involved. These include information costs; enforce - ment costs; and costs due to the weak governance structure of firms and markets. Their analysis concludes that if these costs are prohibitively high, firms leave the equity market and resort to debt financing through banks (101–15). But banks are highly leveraged institutions that borrow short (deposits) and lend long. This maturity mismatch creates potential for liquidity shocks and instability. And perhaps to different degrees, even in the case of banks, there are information problems that lead to market failures, such as credit rationing, which paralyzes the opportunity for risky but potentially highly productive projects because they are rationed out of the market. There are two conflicting views of the behavior of banks in financing of proj - ects. Stiglitz (1989) suggests that to protect their financial resources, banks generally discourage risk taking. Therefore, there is an inherent agency conflict. Epistemological Foundation of Finance: Islamic and Conventional 49 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 The entrepreneur (agent) is interested in the high end of the risk-return distribu - tion. By contrast, the bank (principle) is interested in safety, and thus is con - cerned with the low end of the risk-return distribution. This, Stiglitz asserts, “has deleterious consequences for the economy” (1989, 57). He further suggests that “from a social point of view, equity has a distinct advantage: because risks are shared between the entrepreneur and the capital provider the firm will not cut back production as much as it would with debt financing if there is down turn in the economy” (1989, 57). In contrast to Stiglitz’s assertion that banks concen - trate on the lower end of the risk-return distribution for reasons of safety, Hellwig argues that there is an oft-neglected informational problem of banks, which he refers to as “negative incentive effects on the choice of risk inherent in the moral hazard of riskiness of the lend strategy of banks” (1998, 335). This risk materialized dramatically in the period leading up to the recent financial crisis (see Askari and others 2010; Sheng 2009). Conditions for a Vibrant, Robust Stock Market Allen and Gale (2007) suggest that a successful, deep, and active stock market requires that information, enforcement, and governance costs be eliminated or at least minimized. Once this happens, the cost of entry into equity market becomes low and “there is full participation in the market. All investors enter the market, the average amount of liquidity in the market is high, and asset prices are not excessively high” (115). As mentioned, if the Islamic rules of market behavior—such as faithfulness to the terms and conditions of contracts, trust, and trustworthiness—are in place in a society, the informational problems and trans - action costs, governance, and enforcement issues either would not exist or would be at such low levels as not to deter stock market entry. There is, however, a paradigm gap between what Islam teaches and the actual behavior in the market. For this reason, actions governments take and the institu - tions they create to remedy the deficit in informational, enforcement, and gover - nance behavior to reduce the cost of participation in stock markets must be stronger and more comprehensive than exist today. These policies, actions, and institutions should have the competence, efficiency, and enforcement capabilities to elicit the kind of behavior and results that replicate or closely approximate those expected if market participants behaved in compliance with Islamic rules. These would include: • Policies to create a level playing field for equities to compete fairly with debt- based instruments; this means removing all legal, administrative, economic, financial, and regulatory biases that favor debt and put equity holding at a disadvantage; • Creating positive incentives for risk sharing through the stock market; • Investing in massive public education campaigns to familiarize the population with the benefits of stock market participation: the kind of campaign that Prime Minister Thatcher’s government ran in the United Kingdom, which sub - stantially increased stock market participation in a short span of time; 50 Epistemological Foundation of Finance: Islamic and Conventional Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 • Investing in human capital to produce competent, well-educated, and trained reputational intermediaries—lawyers, accountants, financial journalists, and religious scholars—which means investing in the creation of world class busi - ness and law schools; • Limiting short sales and leverage (including margin operations) of nonbank financial institutions and the credit-creation ability of banks through pru - dential rules that effectively cap the total credit the banking system can create; • Developing a strong and dynamic regulatory and supervisory system for stock exchanges that not only continuously monitors the behavior of markets and participants but stays a few steps ahead of those with a penchant and motiva - tion to use regulatory arbitrage to get around rules and regulations; • Finding ways and means of regulating and supervising reputational intermedi - aries, or at least mandating that they become self-regulating to ensure that false reporting or misreporting, or both, are minimized, under threat of liability to market participants; • Ensuring completely transparent and accurate reporting of the day’s trade by all exchanges; and • Instituting legal requirements for the protection of the rights of minority shareholders. These policies and actions are by no means exhaustive, but even this incom - plete list would help reduce the cost of market participation, invest the market with credibility, and reduce reliance on debt financing. Black (2000) asserts that just one element of the above list, legal protection of minority shareholders’ rights, gives countries large stock market capitalization, larger minority share - holder participation in the stock market, more publicly listed forms relative to the total population, less concentrated ownership, higher dividend payout, and lower cost of capital. Black also believes that a country will have the potential to develop a vibrant stock market if it can assure minority shareholders that they can obtain good information about the true value of businesses the listing companies are engaged in, and that there is sufficient legal, regulatory, and supervisory protection against company self-dealing transactions, such as insider trading. Lack of good information about a firm’s true value and the possibility of company self-dealing create the problems of moral hazard and adverse selection. Both problems can be addressed by legal rules and procedures, as well as by the existence of efficient and credible public and private institutions that monitor the stock market and companies listed on the stock exchange. These laws and institutions can assure investors of the honesty of dealings by firms and of the full transparency and accuracy of reporting and information. Extensive laws regarding financial disclosure—along with securities laws with strong sanctions for imposing the risk of liability (to investors) on accountants, lawyers, firms’ insiders, and investment bankers in retaliation for false reporting, fraudulent Epistemological Foundation of Finance: Islamic and Conventional 51 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 misleading information, or faulty endorsements—can be powerful tools of dissuading all concerned from the temptation of defrauding investors with false reporting and misleading information. Requiring reputational intermediaries to be licensed by regulators, and revoking licenses or imposing heavy fines and initiating criminal proceedings against misbehavior, weakens the incentive struc - ture for abuse of reporting, endorsing, and information processes. Strong listing standards that stock exchanges enforce fully through imposition of heavy fines or even delisting of companies that violate disclosure rules would discourage false information from reaching investors. Existence of an active, dynamic, well- informed financial press can be valuable in creating a culture of disclosure. A strong, independent, and dynamic regulatory agency is needed to monitor and supervise the stock market and behavior of its participants and aggressively promote a culture of transparency by requiring prompt and accurate reporting on all trades in the market. Finally, it bears repeating that government must invest considerable resources in developing world class business and law schools to ensure a competent source of supply of human capital to act as reputational intermediaries. While these policies and institutions are crucial for reducing the cost of participation in stock markets and thus promoting widespread risk sharing, governments need to do more; they must lead by example. They could become active in markets for risk sharing. Generally, governments do share risks with their citizens and organizations. They share risks with individuals, firms, and cor - porations through tax and spending policies; they are silent partners. They also share the risk of the poor and disadvantaged through social expenditure policies. They share the risk of the financial system through monetary policy and deposit guarantees. They could choose to finance part of their budget, at least develop - ment spending, through risk sharing and direct ownership of development projects with their citizens. In this way, they would reduce the debt burden on the budget. This reduction in government borrowing would reduce the burden on monetary policy as well. Governments undertake public goods projects because the characteristics of these goods—notably, indivisibility and nonexclu - sivability—prohibit their production by the private sector. However, their social rate of return is substantial, and much higher than private rates of return. These projects could be undertaken jointly with the private sector through public- private partnerships. The proposal has a number of problems that must be resolved: market distortion, informational, and governance problems are just three of these (see Choudhry and Mirakhor 1997). Government Finance and Risk Sharing Financing a portion of government’s budget through the stock market has many advantages, fifteen of which are summarized here. First, it can energize a stock market—provided that all preconditions, in terms of human capital, and the legal, administrative, and regulatory framework are met—and help strengthen the credibility of the market. Second, it can deepen and broaden the stock 52 Epistemological Foundation of Finance: Islamic and Conventional Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 market. Third, it can demonstrate that stock markets can be used as a tool of risk and financial management. Fourth, it can reduce reliance of the budget on borrowing, thereby imparting greater stability to the budget, and mitigate the risk of “sudden stops.” Fifth, it can have positive distributional effects because the financial resources that would normally go to servicing public debt can now be spread more widely among the public as returns to the shares of government projects. Sixth, it can enhance the potential for financing a larger portfolio of public goods projects without the fear of creating an undue burden on the bud - get. Seventh, it can make the task of monetary management simpler by limiting the amount of new money creation and limiting the number of objectives of monetary policy. Eighth, it can promote ownership of public goods by citizens, and thus have a salutary effect on maintaining public goods, as it can create an ownership concern among the public, and to some extent mitigate “the tragedy of commons.” Ninth, it can have the potential to strengthen social solidarity. Tenth, it can also have the potential to promote better governance by involving citizens as shareholder-owners of public projects. Eleventh, it can provide an excellent risk-sharing instrument for financing of long-term private sector investment. Twelfth, it can also be an effective instrument for firms and individuals to use to mitigate liquidity and productivity risks. Thirteenth, by providing greater depth and breadth to the market and minimizing the cost of market participation, governments can convert the stock market into an instru - ment of international risk sharing, as other countries and their citizens and other investors can invest in the domestic stock market. Fourteenth, it can change the basis of monetary expansion from credit to equity as economic expansion in the real sector maps onto the financial sector. Finally, it can help demystify Islamic finance and create an environment of cooperation and coordination with inter - national finance. The design of risk-sharing instruments to be issued by governments is not difficult. These instruments can be traded in the secondary market if the share - holders experience a liquidity shock. Their rate of return can be structured as an index of return tied to the rate of return to the stock market. If the domes - tic stock market is not deep, then an index of regional or international stock market returns, or both, can be included. The argument is that since the social rate of return to public goods is much higher than the return to privately produced goods and services, the investment in public goods should have a rate of return at least as high as the return to the stock market to promote efficient resource allocation. Of course, since governments are usually less risky, the rate of return to government-issued shares must be adjusted downward to take account of governments’ risk premiums. Depending on the country and the interest rate its government pays on borrowed money, it is not likely that the rate of return it would pay to holders of equity shares it issues— adjusted for the credit rating of the government reflected in lower risk—would be any higher than the interest rate it would pay to borrow. Even in the unlikely event that a few more basis points higher must be paid, the tradeoff is worthwhile, considering the positive contributions the instrument would Epistemological Foundation of Finance: Islamic and Conventional 53 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 make to the economy and the society (see Choudhry and Mirakhor 1997; Ul Haque and Mirakhor 1999). Summary and Conclusion This chapter has sought to trace the epistemological roots of conventional and Islamic finance. The reason for interest in the two fields is that the current Islamic finance industry evolved over the past three decades from conventional finance to address a market failure in conventional finance in terms of unmet market demand for Islamic finance products. Most practitioners of Islamic finance were bankers and market players well-versed and often well-established in the conventional finance sector. Their focus was, and is, to develop financial instruments familiar to the conventional finance market, albeit with religious compatibility as an objective. Their ingenuity, combined with the active and creative imagination of leading religious scholars, has led to the development of a rich array of synthetic and structured products, all of which, in one form or another, are replicated, retrofitted, or reverse engineered from conventional finance. This vast array—ranging from simple instruments such as lease-purchase to exchange traded funds (ETFs) to leveraged buyouts (LBOs)—are Islamic insofar as an attempt is made to ensure that fixed interest rates are avoided. This chapter contends, however, that this, at best, is only meeting the second half of the part of verse 275 of chapter 2 of the Qur’an, in which Allah (swt) first ordains exchange contracts and then prohibits Al-Riba contracts. The chapter argues that this approach has further entrenched the current Islamic finance industry within the conventional financial system, rendering the Islamic finance industry a new asset class within the conventional system. The Islamic finance industry could have taken a different course, as a number of pioneering scholars had defined a trajectory for its development based on risk sharing (profit-loss sharing, or PLS). In any event, it was conventional finance that gave Islamic finance industry its take-off platform, thus making the study of the epistemology of conventional finance relevant. This chapter has argued that it is an economic system that gives rise to a financial system. Therefore, to understand the origin of a financial system, one needs to understand the epistemology of its underlying economic system. Economists trace the epistemology of the conventional economy to Adam Smith. It was the genius of Kenneth Arrow and his principle co-authors, Gérard Debreu and Frank Hahn, to attempt to provide an analytically rigorous proof of what they saw as the vision of Smith for an economy. However, a number of contem - porary scholars, including Amartya Sen, consider the neoclassical understanding of Smith’s vision as distorted and an inadequate representation of Smith’s works. This chapter argued that Smith’s vision of the institutional infrastructure of the economy—that is, the moral-ethical rules governing behavior prescribed by “the Author of nature”—echoes some of the important rules prescribed by Allah (swt) in the Qur’an and operationalized by His Beloved Messenger. There is some tantalizing evidence from Arrow in the mid-1970s that suggests that he 54 Epistemological Foundation of Finance: Islamic and Conventional Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 thought that those ethical-moral rules are crucial to the efficient operation of the economy. The economy-finance nexus defined by Arrow-Debreu-Hahn GE models were risk-sharing conceptualizations in which securities represented contingent financial claims on the real sector. Equity share claims represent first-best instruments of risk sharing and satisfy characteristics required of Arrow Securities. It would appear that had the financial markets in industrial countries developed their financial sector along the lines suggested by the Arrow-Debreu-Hahn model, they could have had much more efficient risk sharing, and perhaps avoided the crises that have plagued the conventional financial system. A number of post-mortem analyses of the recent crisis have developed con - structive insights that may help steer the conventional system away from high credit, high leverage, and high debt, which are the ultimate causes of all financial crises (Reinhart and Rogoff 2009). Almost all of the many recommendations for reform of the conventional system—from The Stiglitz Report (Stiglitz 2010), at one end of the spectrum of thought among financial-economic scholars and practitioners, to The Squam Lake Report (French and others 2010), at the other end—include some form of control, whether direct or indirect, on credit, debt, and leverage within the financial system, including higher capital adequacy requirements. Some analysts have gone beyond these recommendations and have suggested reform of the fractional reserve banking system and deposit insurance (Kotlikoff 2010). It is likely that if such reforms are implemented, reliance on debt-creating flows within the conventional system would decline in favor of greater equity. Basil III has already taken steps—although not as significant as scholars such as Stiglitz or Hellwig have demanded—to enhance capital adequacy requirements, impose limits on leverage, and curtail proprietary trading of the banks. Whether these changes will be sufficient to induce the conventional system to move away from its overwhelming dominance on interest-based debt contracts, risk transfer, and risk shifting or whether it will take more severe bouts with crises before it does so remains to be seen. A healthy debate is in progress regarding the future direction of Islamic finance. This chapter suggests a way forward that all countries would have to follow in any event to develop an effective financial system. The chapter has argued that risk sharing is the objective of Islamic finance. Theoretical and empirical research has shown a robust link between the strength of the financial system and economic growth (Askari and others 2010). This research has also demonstrated the crucial role that stock markets play in underpinning the strength of the financial system. Stock markets are also an effective instrument of international risk sharing, as well as a tool of individual and firm risk manage - ment. Therefore, developing countries are working toward organizing stock markets as part of their effort at financial development. This chapter argues that active involvement of governments in creating a vibrant and efficient stock mar - ket, and their participation in that market by financing a portion of their budget with equity, can create the incentives and motivation for further development of more effective risk-sharing instruments of Islamic finance. Epistemological Foundation of Finance: Islamic and Conventional 55 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 The progress of Islamic finance over the last three decades is well recognized. In the course of its evolution thus far, the market has developed an array of short- term, liquid, low-risk instruments. While instruments of liquidity are needed in the market, so are instruments of long-term investment. What is of concern is that very little or no effort is being spent in developing instruments that can serve the long-term, less liquid, higher-return investments that have greater potential for generating employment, income, and economic growth. There is a strong perception that Islamic finance is focusing on developments of relatively safe instruments with debt-like characteristics promising maximum return with minimal risk in the shortest possible time. It is thought that this is what is driving Islamic finance. Currently, this is a major apprehension. Concentrating market energies on these types of instruments has possible detrimental effects. There is the possibility of repeatedly reinventing the same short-term, liquid, safe instru - ments, with only a small difference in finetuning, slicing, and dicing risk for purposes of product differentiation. The theory of spanning, which provided the analytic basis for the development of the derivatives market, assures that this process can be never-ending. The theory argues that one basic instrument can be spanned into an infinite number of derivatives. If the resources of the market are taken up by investment in these types of instruments, the economy will be deprived of financing for long-term investment on a risk-sharing basis. There is a perception that the demand-driven market values safety and this is the reason why longer-term riskier Islamic finance instruments are not being developed. While the market should have instruments to meet the demand for short-term, low risk, and liquid trade financing, it would be unfortunate if the future evolution of Islamic finance focuses only on short-termism at the cost of neglecting the longer-term investment needs of the real sector. While instruments developed so far emphasize safety, the recent crisis in the conventional system, as well as the turmoil in the sukuk market, demonstrate that no one instrument is immune to risk and that it is unrealistic to perpetuate a myth that safety with high returns in financial markets is possible. There is always risk. The question is how to allocate it to those who are in the best position to bear it and how to build a system resilient enough to absorb shocks emanating from the materializa - tion of risk. The answer must surely lie in a system that provides a full-spectrum menu of risk-sharing instruments. A related concern is that by focusing solely on short-termism, there is the possibility of encouraging the emergence of path-dependency. Economic changes generally occur in increments. Growth of markets and capital formation are path-dependent. That is, later outcomes are partly a function of what has inspired the earlier rounds of economic and financial exchange (Sheng 2009). Once path- dependency sets in, change becomes difficult. At times, path-dependency is exacerbated by the insularity and silo mentality generated by a perception that all is well with established ways of doing things, and therefore no change is required. There is a concern that such path-dependency may well emerge that conveys a message that short-termism, safety, and liquidity, as well as no riba , are all there is to Islamic finance. The thrust of this chapter is that this is not so. 56 Epistemological Foundation of Finance: Islamic and Conventional Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 Islamic finance is more about risk spreading and risk sharing. This chapter suggests that, for those who are able to participate in the financial sector, Islamic finance provides risk sharing through transactions. For those unable to utilize instruments of Islamic finance to mitigate risk because of poverty, the financially able are commanded to share the risks of the less able through the redistributive instruments prescribed by Islam. Thus the financially more able must share the risks to the life of the poor—not as an act of charity but as a duty of redeeming a right of the less able: a right that is a direct result of the property rights prin - ciples of Islam. Inheritance laws are also a means of risk sharing. One must not lose sight of the fact that Islamic finance is a new industry. After centuries of atrophy, it has begun operating at a noticeable level of commercial significance only recently. In the process, it is competing against a path- dependent financial system that is centuries old. It is making a serious attempt to return to its roots, but systematically and within the framework of the current economic, social, and financial reality. This would suggest that in time, Islamic finance can and will develop a full-spectrum menu of instruments to serve all risk-return appetites. This chapter, without contradicting this argument, suggests a way forward by arguing for government intervention to develop a vibrant and active stock market that can energize and accelerate progress. This can be justified on many grounds. Among the most compelling, empirical evidence has shown a strong and robust relationship between financial development, including an active stock market, and economic growth. Arguably, the stock market is the first-best instrument of risk sharing. Developing an active and efficient stock market can promote international as well as domestic risk sharing that can make the economy and its financial system more resilient to shocks. Moreover, this chapter suggests that lack of available equity instruments within the menu of Islamic finance instruments is akin to a market failure, creating a strong ground for government intervention. Additionally, the chapter suggests that the introduction of Islamic finance at the global level represents a remedy for the failure of financial markets to meet a strong demand for Islamic instruments. It took a top-down, government commitment, dedication, and investment of resources, particularly in the case of the government of Malaysia, to correct this market failure. Government intervention can remedy the current failure of the market to develop long-term, riskier, higher-return equity instruments. Some 65 years ago, Domar and Musgrave (1944) suggested that fuller participation of government in sharing the private sector’s gains and losses would encourage a greater amount of risky investment (see also Stiglitz 1989). This governments could do by developing a stock market with low costs of entry to ensure the widest possible participation by investors. In doing so, governments could also ensure that stock markets would have limitations on short selling and leverage operations by estab - lishing market-based regulatory measures. Creating such a stock market would represent a leap forward by providing an effective instrument for domestic and international risk sharing and long-term equity investment. This chapter suggests Epistemological Foundation of Finance: Islamic and Conventional 57 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 that governments can enhance the credibility and appeal of the stock market by financing part of their budgets by issuing equity shares that would be traded in the market. Government could also mount public information campaigns to educate the population regarding the risk-sharing characteristics of the stock market. This strategy was adopted in the United Kingdom, with considerable success. Islamic finance has developed instruments to serve the low end of the time-risk-return profile of its transactions menu. Such a stock market would serve the high end. 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Although it is still a niche market and its share in world finance is quite small, it is nevertheless poised for further rapid expansion as economic development proceeds, particularly in the Muslim world. The current composition of Islamic finance consists of roughly $800 billion in Islamic banking funds; $100 billion in the sukuk (Islamic bonds), and another $100 billion in Takaful (Islamic insurance), Sheng (2011) estimates. According to data recently released by Standard & Poor’s, in the first quarter of 2011, $32.4 billion of sukuk, were issued, compared with $51.2 billion raised in all of 2010. The engine of the global market up to now has been Malaysia, which accounted for 58 percent of funds raised in the first quarter. However, the situation may be changing, with the big Western banks such as Goldman Sachs and HSBC deciding to enter the Islamic bond market. This is partly due to the current financial difficulties of the Euro Area banks and con - ventional debt markets. HSBC’s Middle East unit became the first Western bank CHAPTER 2 Andrew Sheng is President, Fung Global Institute, Hong Kong, and the Third Holder of the Tun Ismail Ali Chair, University of Malaya, Malaysia. Ajit Singh is Emeritus Professor of Economics, University of Cambridge; Life Fellow, Queens’ College, Cambridge, the United Kingdom; and the Fifth Holder of the Tun Ismail Ali Chair, University of Malaya, Malaysia. In 2012, he was appointed to the Dr. Manmohan Singh Chair at Punjab University, Chandigarh, a newly created professorship to honor the Indian Prime Minister. 68 Islamic Finance Revisited: Conceptual and Analytical Issues from the Perspective of Conventional Economics Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 to issue a sukuk in May 2012; it was worth $500 million and carried a maturity of five years. The French Bank Credit Agricole has said it is considering issuing an Islamic bond or creating a wider sukuk program that could lead to several issues. However, the big recent event in the Islamic bond market has been the controversial decision of Goldman Sachs to raise $2 billion from this market. The controversy is due to the fact that several Shari’ah law scholars have argued that the Goldman Sachs’ sukuk does not meet requirements of Shari’ah law. However, the merchant bank denies the charge of noncompliance and appears to be stick - ing to its decision to go ahead with the sukuk (Reuters 2012). The rapid growth of Islamic finance, however, has not been a spontaneous event but one carefully prepared and helped by Islamic governments and their central banks. The Central Bank of Malaysia (Bank Negara Malaysia) has been in the forefront of these efforts, and has assisted the growth of Islamic finance by establishing an institutional framework for a clear understanding and propagation of the laws of Islamic finance (see Mirakhor 2010). This is no mean achievement, as Islamic scholars disagree on many crucial aspects of Shari’ah laws. The Malaysian government’s chief objective has been to help establish regulatory and monitoring institutions that will provide an internationally accepted and unambiguous conception of laws relating to Islamic banking and financial organizations. The International Monetary Fund (IMF) has also been helpful in these and other respects, together with a number of other Islamic governments (including those of Bahrain, Pakistan, a
