Islamic Finance in the Western Balkans: Prospects and Regulatory Challenges

What is it about?

We argue, firstly, that the murabaḥa debt-contract is over-emphasized, inefficient, and of questionable value with regards to creating Shariʿah-compliant alternatives to ribā-based finance. Instead, mushārakah, or equity-participation, should be the focus of Islamic financial innovation. A new mushārakah market should be created, allowing 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, we address the legal and regulatory reforms necessary for mushārakah financing to succeed in the Western Balkans. The effective legal protection of the Islamic finance investments should be achieved through 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 increase investor confidence.

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