Shariah’s Black Box

I.  Overview of Shariah-Compliant Finance

A. What is SCF?

According to the disclosures and representations of the financial institutions currently promoting SCF[12], and the Shariah authorities they employ, Shariah compliance means that a particular investment or financial transaction has been conducted or structured in a way considered “legal” or “authorized”[13] pursuant to Islamic law.[14] Compliance with Shariah is generally achieved by having a Shariah authority – either an individual or group of individuals who has achieved an authoritative status in matters relating to SCF[15] – approve of the particular investment or type of transaction. Most financial institutions employ or retain[16] in some fashion what is called a Shariah advisory board, which typically consists of three or more “Shariah scholars” who profess to be generally recognized as an authority in SCF.[17]

According to most financial institutions, SCF is achieved by the avoidance of interest[18], risk (typically understood as uncertainty or speculation)[19], and certain types of prohibited industries (relating to activities considered haram or forbidden, such as the pork and alcohol-beverage industries, pornography, gambling, and interest-based financing).[20] In addition, SCF also is said to include a focus on “purification” which has two separate elements. One, is a form of obligatory charitable contribution called zakat where the act of supporting the less fortunate is considered a spiritual purification[21]; and the other is the purification of a Shariah-compliant investment or financial transaction that has been tainted with forbidden revenue, whether from interest, illicit speculation such as trading in commodity futures, or a forbidden commercial enterprise such as the pork industry.[22] In the latter meaning of purification, the forbidden funds must be disgorged by donating the money to an acceptable charity but this charitable gift will not count towards a Muslim investor’s zakat requirement.[23]

It is quite evident from even a cursory review of these most basic concepts of SCF that at least a rudimentary understanding of Shariah is required to grasp the implications of SCF relative to U.S. law. Per force, this discussion will be elementary yet true to the understanding of Shariah by contemporary and classical Shariah authorities. To begin, Shariah, or the ‘proper way’, is considered the divine will of Allah as articulated in two canonical sources. The first is the Qur’an, which is considered the perfect expression of Allah’s will for man. Every word is perfect and unalterable except and unless altered by some subsequent word of Allah.[24] While most of the Qur’an’s 6,236 verses[25] are not considered legal text, there are 80 to 500 verses[26] considered instructional or sources for normative law. But the Qur’an is only one source of Allah’s instruction for Shariah. The Hadith[27], or stories of Mohammed’s life and behavior, are also considered legal and binding authority for how a Muslim in any place at any time must live. The Hadith were collected by various authors in the early period after Mohammed’s death. Over time, Islamic legal scholars vetted the authors for trustworthiness and their Hadith for authenticity and there is general consensus across all Sunni schools that there are six canonical Hadith.[28] The legal or instructional portions of the Hadith together make up the Sunna.[29] While the Shariah authorities from the Shi’a Muslim world also accept the Hadith as authoritative, they differ on the selection of the authors accepted as authoritative based upon mostly theological grounds.[30] For all Shariah authorities, however, the Qur’an is considered the direct revelation of Allah’s will and therefore primary, while the Sunna is the indirect expression of that will and secondary. Both sources are considered absolutely infallible and authoritative.

In order to divine the detailed laws, norms, and customs for a Muslim in all matters of life, the Shariah authorities over time developed schools of legal jurisprudence adhering to certain theological and jurisprudential rules to guide their interpretations of the Qur’an and Sunna. While there is broad agreement among the schools about the rules, there are important distinctions and these differences do result in different legal interpretations and rulings, albeit typically differences of degree not of principle.[31] The rules of interpretation and their application to finite factual settings in the form of legal rulings are collectively termed al fiqh (literally “understanding”). Usul al fiqh, or the ‘sources of the law’, is what is normally referred to as jurisprudence. Technically, Shariah is the overarching divine law and fiqh is the way Shariah authorities have interpreted that divine law in finite ways.[32] It is important to note, however, that the word Shariah appears only once in the Qur’an in this context[33] yet it has gained the currency it has institutionally in the Islamic world only by virtue of the Shariah authorities over more than a millennium creating a corpus juris (i.e., al fiqh) based upon their interpretative understandings of the Qur’an and Sunna. As such, this memorandum uses the word Shariah to mean all of Islamic jurisprudence, doctrine, and legal rulings, much as it is used in the vernacular by the typical Shariah-adherent Muslim.