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ISLAMICFINANCIALINSTRUMENTS
Dr RodneyWilson*
INTRODUCTION
Instrumentsof Trade
Oftenpaperswhich are used to facilitateinternational
transactionsare regardedas
financial
instruments,especiallywhen thereis a marketfor the paper
risk
factoris limitedwithin naxTowly itself,and the
determinedparameters.Perhapsthe best ex-
ampleof such instrumentsare bills of exchange,which
historicallywereone of the
mostimportantmeansof financingbothexportsandimports.A bill
of exchangeis a
ISLAMIC FINANCIAL
INSTRU1ZENTS
207
promiseto paya specifiedsumat a
iimeperiodis usuallysetin filturetime,ratherlikea
advance to postZatedcheque.The
tradedgoodsin question,and coincideapproximately
the bill is writtenby the withthedeliveryofthe
exporter. importerin favourof the
Onreceiptof thebillthe
exporter caneither
cashequivalent, or elsesellit at a discount, holdit to maturity, andthencollectthe
obnouslybepreferable andobt cashimmediately,
Eomthe whichsvill
willreflectboththeiimeperiodpointoflrieW of liquidity. Theamountofthediscount
to
eliated if the exporterhas thematurity andtheriskof default.The
lattercanbe
bill "accepted", whichmeansthat the acceptor
guarantees thepaymentin theeventof
service,as didthe specialistacceptingdefault.Mostmajorbanksprondethistypeof
A chargeis of coursemade housesin the Londonmarket.
vices for acceptances, butthebankswhichprovide
keeprecordsof goodandbad suchser-
risks,and are
individual exportersto ensurethat importers usuallyin a strongerpositionthan
made in writingthebillsin thefirst honourthe cotments they
instance. Once have
become verytradablefinancial billsof exchangeareaccepted
instruments, whosemarketvaluewill be they
maturity dateandinterestratesin related to
involveno interestelementin alternative markets, thoughtthebillsof exchange
Likeothertradablefinancial themselves.
exchange viewthemas somewhat instruments) participants in the marketfor billsof
represent
themeansofpayment. detached Eom theunderlying goodsforwhichthey
though Thisis lessthecasewith
cheapter to arrange, relatedirectlyto theexportsand documentary creditswhich
ments
canonlybe effectedwhenthe importsthemselves. Pay-
thatthegoodshavebeen necessary
evidence shippingdocuments areproduced as
paperis muchmoreclosely dispatched
the orforwarded. Thereis a sensein which
makes connectedto the realphysical
documentary creditsa muchlessperfect transaciions,
butthis
of
less
easilyquantifiable risksinvolved.Indeed instrument, asthereareso
manytypes
credits
as financialinstruments. manywouldnotregard
documentary
The
Moral Acceptabilityof
Financial Instruments
There
hasbeenvirtuallyno
relaiion questioning concerning ethicalor distributional
to thefinancialinstruments issuesin
major which aretraded in internatonal
Westerneconomies.Mattersof markets andthe
simply
notbeenaddressed. fess, eqliityandjusiicein
It is implicitlyassumedLhat exchangehave
kets
aretrainedprofessionals the
whoknowhowto lookafterparticipants in suchmar-
actions
involveintermediaries whoarebuyingandsellingon themselves. Most-trans-
and
otherfinancialinstitutions. behalfofbusiness clients
with Themarketsareof a wholesale
ie ordinarycitizenare nature,and the links
finance remoteandindirect.The feeling
specialistsis thatsuchmarkets of economistsand
etomental arebestsubjectto minimal
orofficialinterveniion might regulation,as gov-
extremes onlyreducemarketefficiency
mightkillthe market. andif takento
Isthis
lackof concernfor the
between moralityof the marketjustified?
specialistdealersandfinancial Do transaciions
scruiiny
as thosebetweenprivate insiituiionsneedto be subjectto the same
individualsordoesthecorporate natureof thepar-
ARAB LAW QUARTERLY
208
ticipantsmeanthat differentconsiderationsshouldapply?
How
individualclients and shareholdersshouldinstitutionsbuying accountableto their
and selling financial
instrumentsbe in any case?
In any marketsituaiionthere are alwaysuneven
outcomesin the sense of there
beingwinnersandlosers,but the questionis how greata
gainis sociallyacceptable,
andthe extentto whichlosersshouldbe penalised?It is
not clearthatthe stateshould
attemptto preventtheseoutcomeswhicharepartof the
incentivemechanism,though
it maywish to limitextremescenarios.Clearlyin a
marketin whichonly insiituiions
with considerableresourcesparticipate,thereis less
worryaboutdistributionalcri-
teria.Neverthelessa seriesof errorsin decision-making
can drivean insiituiionmto
insolvencyand ultimatebankruptcy,whichwill inevitably
resultin loss of employee
incomeandevenunemployment. Therewill alsobe lossesforclientsof the insiinltion,
and shareholdersmay unwitiinglysee theirassets
become
this to be acceptedas an unavoidableoutcomeof market suddenlyvalueless.Is all
forces?
FUTURE
XEVELOPMENTS
There are severallikelyways forwardas far as Islaniicfinancialinstrumentsare con-
cerned. One is obviously to make increaseduse of existing Islamic financial in-
struments,such as zero couponbonds,paperfor tradefinanceandunitisedsecunties.
214 ARAB LAW QUARTERLY
FURTHER READING
AhmedEl-Ashker,TheIslamicBusinessEnterpnse,CroomHelm,London,1987.
GilbertBeauge,Les Capitauxde l'Islam,Pressesdu CNRS,Paris,1990.
JulianFranks,John Boyd and WillardCharleton,CorporateFinance:Conceptsand
Applications,
KentPublishing,Boston,1985.
JohnGilbody,7theUK Monetaryand FinancialSystem,Routledge,London,1988.
ZubairIqbaland AbbasMirakhor,IslamicBanking,IMF OccasionalPaper,No. 49,
Washington,1987.
KV Peasnelland CWR Ward,BritishFinancialMarketsand Institutions,Preniice
Hall, New Jersey,1985.
RodneyWilson(ed.)IslamicFinancialMarkets,Routledge,London,1990.