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Shariah Principles for Islamic Capital Markets and the Regulation of Market Abuse in UK and the US: Common Grounds, Divergences and Proposal for Reform

Ahmed, Kabir

[Thesis]. Manchester, UK: The University of Manchester; 2013.

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Abstract

ABSTRACTInvestor protection is the essence of Islamic banking and capital markets. Shariah aims to promote fairness in the exchange mechanism, prohibit abuse, exploitation and harm, protect investors and safeguard public interest. The purpose of this thesis is to explore and compare Shariah’s principles for investor protection from market abuse with the rationales and theories of prohibition underpinning the UK and US legal market abuse framework in securities markets. Shariah takes a completely different and a very comprehensive approach in combating market abuse. It takes a two pronged approach. Firstly, it propounds compliance and incorporation of ethical principles, Quranic proscription, and Prophetic commandments in the legal framework which prohibit market abuse before it occurs. Secondly, its unique contractual structures facilitate fair exchange. The product innovation incorporates ancient contractual structures as building blocks with inbuilt safety features to curb abusive speculation, manipulation and distortion in the price formation mechanisms. These principles and contractual structures successfully safeguarded the interest of participants in one to one transactions in barter based ancient markets in Mecca and Medina. The thesis analyses the validity of the aforementioned approach in regulating market abuse in impersonal trading in the context of emerging technologically advanced Shariah compliant stock exchanges. It also explores how Shariah’s approach facilitates the smooth interplay of market forces and uninterrupted natural equilibrium devoid of exploitation and harm. In the light of the antiquity of Shariah’s ethical principles and contractual structures and the modern securities markets offering a sophisticated electronic trading platform, it presents a particularly challenging task to put together a coherent theoretical Shariah based market abuse framework for the smooth operation of advanced equity, debt and derivative products. The thesis also comprehensively analyses the speculative nature of modern equity, debt and derivative products and illustrates how, in contrast, long standing Shariah compliant contractual structures provide inbuilt safety features to reduce the potential for volatility and distortion in the price formation mechanism. It further highlights non-Islamic features and practices in the conventional spot, forward and futures markets and illustrates their susceptibility to facilitate abusive and excessive speculation, distortion and manipulation. Based on the comparative analysis of the rationales of UK and US market abuse regimes and Shariah principles, the thesis concludes by highlighting common ethical approaches, divergences and how Shariah based market abuse approach could be used to improve the integrity and stability of the UK and US securities Market.