It is often argued that Muslim countries have a natural inclination to move towards a model in which Shariah-compliant finance dominates. But at the moment, even for Islamic industry centres like Saudi Arabia and the UAE, this would entail a big increase from the current market share.
Prospective participants so the argument goes just need assurances that adopting Islamic finance principles would still allow them the flexibility to do business with the conventional market and to effectively risk-manage positions.
But those assurances are in short supply. The palpable discomfort of leading scholars in answering questions about Goldman Sachss sukuk plans at a recent Euromoney Islamic finance conference will be as nothing compared to the headaches that topics like Islamic derivatives and short term liquidity tools look set to cause in 2012.
At a time when the wider market is pursuing greater regulation, Islamic finance should keep pace, say its critics.
Perhaps it is faulty or inappropriate conventional-market thinking to suggest that Islamic finance will only achieve greater credibility with greater standardisation. But the notion clearly struck a few conference attendees that a potential issuer as important and pace-setting as Goldman Sachs, for example, should have a right to approach top Islamic finance scholars and expect them to give their judgement, whether positive or negative. Investors also deserve answers, so they can act with confidence.
Public indecision over a deal like Goldman's is perhaps understandable, given that approval could open a Pandoras Box of conventional entrants to the sukuk arena. But top scholars must show their stomach for the challenge in this and other cutting-edge matters. It is no longer (if it ever was) acceptable to hide behind the catch-all excuse of we neither accept nor refute.
Maybe a central arbitration panel is required (or regional if that is more palatable). This could remove the reliance on bespoke sign-offs every time a new question arises. Naturally, scholars raise all kinds of objections to this: it would be too difficult, too rigid, governments would interfere, who would decide?
These are challenges, but they are not insurmountable. Helpful analogies abound in the conventional credit sector. If a bond defaults, for instance, one can go to Isda and ask if a credit event has taken place. Isda gives its verdict in a timely manner, based on a defined set of criteria and path of arbitration.
By comparison, the Islamic market considering cutting edge products looks rather like a blind man who wants to cross the road. Some helpful people tell him he should cross immediately and take his chances with the traffic. Others declare it will never be safe so he should just forget about it.
Then there are the traffic experts, the scholars: they know the road and can act as lollipop men to help him get across. But for whatever reason, they often appear reluctant to assist perhaps they are too busy, or worried about their own safety amid the busy traffic.
So what is the blind man to do? He can stay exactly where he is, or he could wander off in another direction and become lost. Worse still, he might walk out into the road at the wrong time and get hit by a bus.
There is another option, of course. He might figure out that he could build a traffic light. And that would put the lollipop men out of a job.
For more news on Islamic finance, see www.securities.com/ifis