Islamic Finance in the Western Balkans: Prospects and Regulatory Challenges

In this article the authors contend that the murabah.a debt-contract is over-emphasized, inefficient, and of questionable value with regards to creating Shari. ah-compliant alternatives to riba-based finance. Instead, they argue that musharakah, or equity-participation, should be the focus of Islamic financial innovation. They propose the creation of a new musharakah market that would allow investors to bid for participation in investment projects, which would be distinguished from existing equity markets by requiring the direct participation of investors in a project's management. Second, the authors address the legal and regulatory reforms necessary for musharakah financing to succeed in the Western Balkans. They recommend the protection of property rights through financial arbitration mechanisms rather than court litigation. Arbitration resolves the conflict of laws inherent to Islamic finance, by providing a means of negotiating disputes between Islamic and secular sources of law. These measures reduce transaction costs associated with equity participation and thereby increase investor confidence.