Islamic Capital Markets: Market Developments and Conceptual Evolution in the First Thirteen Years

39 Pages Posted: 9 Mar 2011 Last revised: 5 May 2011

See all articles by Michael J. T. McMillen

Michael J. T. McMillen

Curtis, Mallet-Prevost, Colt & Mosle LLP; University of Pennsylvania Law School; Columbia Law School

Date Written: April 24, 2011


This paper considers the factors the allowed for the birth and facilitated the subsequent development of the equity side and the finance (or debt) side of the Islamic capital markets. The equity side of the Islamic capital markets began in 1998 with the issuance (after five years of debate) of a fatwa to Dow Jones Islamic Market Indexes in respect of the first equity indexes of Shari'ah-compliant equities. That fatwa institutionalized permissible variance or permissible impurity concepts relating to equity investments in entities that (a) had some degree of impermissible interest income or interest expense or (b) conducted some impermissible business activities (such as those involving activities relating to alcohol or pork for human consumption, interest-based financing, non-takaful insurance, pornography, prostitution or weapons, among other matters). That fatwa also institutionalized purification or cleansing techniques to address impermissible income actually received (such as from interest on investments or earnings from allowed impermissible business activities). The paper surveys the application of these variance and purification concepts and principles in areas of finance and investment other than non-controlling equity investments: for example in private equity, real estate and project finance. The finance side of the Islamic capital markets began in the period of 2001-2003 with the first sukuk issuances from the Middle East (there had been earlier issuances in Malaysia). The paper surveys the types, amounts and purposes of sukuk issuances from 1997 to August of 2008 (looking at every issuance during that period) and, separately, issuance trends since August of 2008 (through the period of the global financial crisis). The paper considers the highly-publicized clarification of sukuk standards and principles that was issued by the Shari'ah Board of the Accounting and Auditing Organizatio for Islamic Financial Institutions in March of 2008 in response to the fact that most sukuk issued in the years prior to 2008 had been impermissible bond structures (rather than permissible asset securitization or entity securitization structures). Implications of that clarification are considered. The paper also surveys some of the market and legal impediments to full development of the Islamic capital markets.

Keywords: Islam, Shari'ah, Islamic finance, Islamic investment, capital markets, Islamic capital markets, fatwa, fatawa, private equity, real estate finance, real estate investment, sukuk, Islamic bonds, asset securitization, whole business securitization, entity securitization, securitization, equity index

JEL Classification: F30, F33, F34, F36, G15, G21, G30, G32, G39, K00, K12, K30, K33, K49

Suggested Citation

McMillen, Michael J. T., Islamic Capital Markets: Market Developments and Conceptual Evolution in the First Thirteen Years (April 24, 2011). Available at SSRN: or

Michael J. T. McMillen (Contact Author)

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