Shariah’s Black Box

[11] This conclusion has been reached by a thorough review of the published proprietary and non-proprietary information disseminated by many of the financial institutions and the professional facilitators (i.e., the law firms, accounting firms, and financial advisors who promote SCF as a business model and marketing niche) and of the published academic and trade journals which have treated SCF in some detail over the past decade. Some of this material will be referenced throughout this memorandum as its relevance to disclosure, due diligence, compliance, industry standards, and best practices are examined.

[12] A good yet basic recitation of SCF by a U.S. Muslim academic who was the “Scholar-in-Residence: U.S. Department of Treasury”on SCF is in Mahmoud Amin El-Gamal, A Basic Guide to Contemporary Islamic Banking and Finance (June 2000), available at https://www.nubank.com/islamic/primer.pdf (last visited Jan. 24, 2008).

[13] In classical and traditional Islamic law, extant and in use to this day by the recognized Shariah authorities, there are essentially five categories of normative assessments: obligatory, recommended, permitted, discouraged, and forbidden. Encyclopedia of Islamic Law: A Compendium of the Major Schools xxxvii-xxxviii (Laleh Bakhtar ed., 1996).

[14] While Shariah is often referred to as Islamic law, Shariah is according to the Shariah authorities the divine law of Allah which is articulated directly to man through the Qur’an and indirectly through the canonical stories of Mohammed’s life as told through the Hadith. The jurisprudential rules developed by the Shariah authorities over time to arrive at finite legal rulings are often referred to as usul al fiqh or the roots of the law and al fiqh or just fiqh is the corpus of jurisprudential rules and principles. Furu’ is the term used for the positive law rulings of individual jurists. For a discussion of this in more detail, see infra note 32. For purposes of this memorandum, the word Shariah is used as a collective term to include all of these elements unless otherwise indicated. This is how most Muslims use the word in the vernacular.

[15] There is no universally recognized degree or examination to acquire the status of an SCF authority. Generally, the discipline in Shariah related in part to commerce is termed fiqh al muamalat and while there are jurists who specialize in this area, the qualifications for such positions are quite varied. While the industry itself is undertaking to create standards and structures for uniformity and transparency, it has not been successful to date. An examination of these issues can be found in Wafik Grais & Matteo Pelligrini, Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services (World Bank Policy Research Working Paper No. 4054, 2006), available at https://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2006/11/08/000016406_20061108095535/Rendered/PDF/wps4054.pdf (last visited Jan. 24, 2008).

[16] The manner in which a Shariah advisor is employed or contracted for by the financial institution bears on several of the legal complications and risks discussed herein. See infra notes 48-51 and accompanying text (discussing criminal respondeat superior); see also supra note 14  and accompanying text.

[17] The number of Shariah scholars sufficiently versed in the disciplines necessary to be gainfully employed by a “blue chip” financial institution engaged in SCF is quite limited. It is generally represented that there are only about 20-25 competent Shariah scholars who have mastered Shariah, finance, and English well enough to be considered both an SCF scholar and employable. Richard C. Morais, Don’t Call It Interest, Forbes.com, https://www.forbes.com/business/global/2007/0723/104.html (last visited Jan. 24, 2008). For the general problem of the dearth of qualified Shariah scholars, see Grais & Pellgrini, supra note 15, at [page number here] & n.18.

[18] In Arabic, the term used is riba, which literally means “increase.” In the past, there has been debate among Shariah authorities and Islamic academic scholars over the prohibition against riba in financial and commercial transactions. Some scholars point to the fact that the prohibition against interest in the Qur’an is not simple interest but usurious interest and specifically a default interest prevalent in pagan pre-Islamic Arabia. Today, the debate is academic because there is broad consensus that interest of all kinds is forbidden by Shariah. For the consensus view of the prohibition against interest, see Frank E. Vogel & Samuel L. Hayes, III, Islamic Law and Finance: Religion, Risk, and Return 71-87 (1998).  For a contrarian position, see Timur Kuran, Islam & Mammon: The Economic Predicaments of Islamism 14 (2004); see also Alex Alexiev, Islamic Finance or Financing Islamism? 6-7 (The Center for Security Policy, Occasional Papers Series No. 29, 2007). For a general discussion of how contemporary SCF has perverted the “intent” of an “authentic” Islamic political economy, see Mahmoud Amin El-Gamal, “Interest” and the Paradox of the Contemporary Islamic Law and Finance, 27 Fordham Int’l L.J. 108 (2003); Chibli Mallat, The Debate on Riba and Interest in Twentieth Century Jurisprudence, in Islamic Law and Finance (Chibli Mallat ed., 1988).

[19] The Qur’an forbids gambling or maysir; the Sunna includes gharar or risk in the prohibition. Since all business includes an element of risk, the jurisprudential task for the Shariah authorities is to take the specific examples found in the canonical literature, such as “Do not buy fish in the sea, for it is gharar,” and to translate that into principles, then rules and finally into finite rulings and contract forms which are considered halal or permitted. See generally Vogel & Hayes, supra note 18, at 87-95.

[20] While there is general agreement about most of these industries as absolutely forbidden, some such as the tobacco business and military and defense industries are typically forbidden in SCF in Western countries but not considered an absolute Shariah prohibition. For an exploration into the Shariah motives for forbidding defense industry investments in the West, see infra notes 50, 78-81362 and accompanying text.