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DAWN

Encounter, Page 19
Sunday, 11 October 2009

The business of shariah advice

By Syed Imad-ud-Din Asad

ISLAMIC finance comprises financial services, instruments, and transactions that comply
with provisions given in the Quran and the Sunnah. While there are financial norms common to
both Islamic and western financial systems, certain norms are exclusive to Islam. In fact, some of
the restrictions imposed by Islam are severe enough to render certain western financial practices
and transactions absolutely void.
Prohibition of riba and gharar are two of the main restrictions imposed by the
fundamental Islamic texts. The general view is that riba includes both interest and usury. Some
Muslim scholars hold that it only includes usury — many non-Muslim countries prohibit usury
as well. Gharar signifies ambiguity, uncertainty, or lack of specificity in the terms of a financial
contract.
Claiming to be in conformity with these principles, there is a variety of Islamic financial
instruments and transactions available in different markets. These include musharaka, mudaraba,
salam, istisna, qard, murabaha, ijara, tawarruq, sukuk, etc.
Regarding the validity of some of these transactions and instruments, there is a difference
of opinion among Muslim scholars. There are scholars who oppose certain practices because
they find hidden elements of riba and gharar in them. Some products appear Islamic only in
form, not substance. Tawarruq, bai-al-dayn, and bai-al-einah are among the transactions that are
either disallowed or deemed controversial by some scholars.
Most financial institutions conducting Islamic operations have a panel of Muslim
scholars, called “shariah committee” or “shariah board” that determines whether a product or
practice complies with Islamic provisions. Shariah scholars usually receive a fixed fee for their
services. Inn some cases, scholars approved conventional products as Islamic if they get “the
right price”. Thus, the critics of Islamic finance came up with the term “rent-a-sheikh”.
The number of these experts comes to between 100 and 200 but 12 of them are the most
sought after. As reported in Financial Times, these twelve are making millions of dollars a year.
They not only serve on many shariah boards, they even give their advisory services to the rivals.
Malaysia, in 2005, restricted scholars from serving on more than one board or committee.
As shariah can be given different interpretations, the shariah committees, at times, give
conflicting rulings. A product approved by one committee can be rejected by another board
within the same jurisdiction. For instance, in Jordan, a prominent shariah scholar criticised the
penalty imposed on a defaulting client in murabaha, and declared that it is a kind of riba.
Similarly, in Britain, a famous Muslim scholar advises against taking out Islamic mortgages due
to the structure being interest-bearing debt in disguise.
Also, in 2008, Accounting and Auditing Organisation for Islamic Financial Institutions
(AAOIFI) openly questioned the Islamic credentials of sukuk structures — which must have
been approved by some shariah scholar or committee — and claimed that 85 per cent of them
were in violation of Islamic law. The fact that sukuk, not complying with AAOIFI’s opinion,
have been successfully issued, it is another example of this conflict of opinion. Differences also

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arise and exist between countries: in Malaysia, Islamic financial restrictions are construed more
liberally than in Saudi Arabia.
There are bodies and organisations — AAOIFI is one of them — that are trying to
address this lack of standardisation. However, without a consensus among religious experts there
cannot be a binding, universal set of Islamic financial rules. In fact, there is a proposal to set up a
supreme shariah board. Indonesia serves as a good example where a national shariah board
issues rulings that are mandatory for all shariah boards in the country.
Another shortcoming confronting Islamic finance is the shortage of qualified
professionals at all levels. Not many people are skilled in conventional finance as well as Islamic
law. A person well acquainted with conventional finance can easily understand any Islamic
product; however, one cannot successfully develop or market such a product without knowing
the rules and institutions unique to Islam.
Though the share of Islamic finance is very small in the global financial industry, it is
showing an impressive growth. Islamic financial institutions have been set up not only in Muslim
countries, but also in non-Muslim jurisdictions like England and the US, that have Muslim
minorities. Financial bodies like Citibank, HSBC, Standard Chartered, Swiss Re, Munich Re,
etc., are engaged in shariah compliant operations.
Islamic financial institutions take pride in the fact that, unlike their conventional
counterparts, they have emerged relatively unscathed from the global financial crisis. In fact, in
England, two Islamic banks were launched, in 2008, when governments in Europe were busy
bailing out their banks. And while Lehman Brothers collapsed, Islamic Bank of Britain launched
an Islamic residential mortgage.
However, it must be kept in mind that, due to the prohibition of riba, Islamic financial
institutions have never been exposed to the risks that have affected their conventional
counterparts.
Due to the prohibition of riba and gharar, the real Islamic financial products generally
tend to be less profitable than conventional ones. In order to make Islamic financial transactions
more profitable, the Islamic institutions often manipulate and re-engineer Islamic contract forms
to achieve the same results as offered by conventional transactions. According to Moody’s,
“many of the current sukuk types adhere to AAOIFI in form, but not in substance.”
There are transactions in conventional markets, having no Islamic origins and names,
which are totally in compliance with Islamic principles. For example, the private equity
investments in technology companies in the Silicon Valley completely satisfy shariah
requirements.

The writer is a graduate of Harvard Law School and a lawyer based in Lahore.
syed_asad@post.harvard.edu

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