Shariah’s Black Box

[71] In a detailed legal ruling relating to interest earned in a bank in non-Muslim lands, a leading Shariah authority explains that the strictures of Shariah on certain business transactions such as deposits in a non-Muslim bank are relaxed when a Muslim enters the Abode of War (dar al-harb), which is the land of non-Muslims. The point of this ruling is to give a concrete example of how even the Law of Jihad in the context of the doctrines relative to the Abode of War versus the Abode of Islam are integral to the law of commerce. Thus, in the legal ruling, the Shariah authority began his analysis as follows:

. . . In the terminology of Islamic Law, “people of the abode of wara” are not only those who are actually at war with Muslims, but all those who are not formally allied with Muslims by a covenant of protection, such that war could conceivably be declared between them and Muslims at any time.

Id. at 214-245, 224 (emphasis added). For a ruling on whether a Muslim can lease a building in the Abode of Islam to a foreign school for foreign, non-Muslim students and what must be done to separate the male students from the female students, see id. at 27-28.

[72] There is no shortage of academic literature on the political and religious turmoil that existed in the Muslim empires from soon after the death of Mohammed and the battles between the “traditionalists” who sought a Shariah-centered political world and those who opposed it for one reason or another. A good, deep history of Islam may be found in Marshall G. S. Hodgson, The Venture of Islam: Conscience and History in a World Civilization, 3 vols. (1974). And, of course, the required reference to Bernard Lewis, The Middle East: A Brief History of the Last 2,000 Years (1995). For the narrative of the failures in Islamic history for the political leaders to abide by Shariah from the “traditionalist” vantage, see Sayyid Qutb, Social Justice in Islam (2000). For the classic statement on this “theory” versus “practice” and the dominant role of Shariah authorities to determine the theory and even the practice when Shariah is put into practice, see Joseph Schacht, supra note 62. For the lament of a “moderate” Shariah academic scholar who would like to see Shariah and usul al-fiqh modernized so that it might be used to govern modern societies, he suggests that the failure of Shariah to keep pace with modernity was precisely because it often was not fully integrated into Islamic society but rather developed as a private affair among Shariah authorities. Kamali, supra note 24, at 500-521.

[73] This is evident in SCF itself. The sole authorities for determining Shariah compliance or even what is ”Islamic” regarding finance and commerce are the traditional Shariah scholars. Whatever criticism some critics might have of the “Islamist” bent of SCF, there is no serious challenge to the absolute authority of the traditionalists in this discipline. See, e.g., infra note 74.

[74] See, e.g., Vogel & Hayes, supra note 18, at 9-10, 23. Although Professors Vogel and Hayes do not come right out and say that the traditional Shariah authorities are the exclusive authorities on SCF, their entire book is dedicated to convincing Shariah authorities to move toward greater liberality in order to embrace more of modern day finance. Thus, in the conclusion of their highly acclaimed book on SCF, the authors ask: “Does Islamic law (fiqh), as elaborated by the scholars and institutions devoted to it, have the potential to meet all the needs of modern Muslims in the commercial and financial sector, in the traditional sense of offering normative guidance for various aspects of daily life?” Id. at 294. And, in concluding they hold out optimism but recognize the future is in the hands of the Shariah authorities, not the academics:

No doubt many of the legal challenges now facing Islamic finance are disquieting and difficult – such as creating derivatives or other risk-hedging devices or encouraging trade in financial instruments. If fiqh scholars take too cautious and literalist an approach, backing away from the deeper comparative and functional analysis and bolder legal reasoning or ijtihad which is now needed, Islamic finance could languish. Given the record to now, we are optimistic about the future.

Id. at 295.

[75] For the classic statement on the role of consensus, see Schacht, supra note 62, at 30.  For a more general discussion, see id. at 29-75. For a scholarly work on consensus by the revisionist school of new academics, see Wael B. Hallaq, On the Authoritativeness of Sunni Consensus, 18 Int’l J. Middle E. Stud. 427-454 (1986), reprinted in Wael B. Hallaq, Law and Legal Theory in Classical and Medieval Islam VIII (1994) [hereafter Law and Legal Theory]; see also  Coughlin, supra note 24, at 91-109.

[76] For a discussion of the DJII in greater detail, see infra Part III.B.

[77] The fundamental standard regarding disclosure of risks and other pertinent information is whether the risks are material and whether any other information would be material to a reasonable investor. For a more thorough discussion of materiality and other disclosure issues, see infra Part II.E.a.

[78] This fund was begun in 1999 and liquidated in 2002. For access to its SEC filings, see https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001088654&owner=include&count=40 (last visited Feb. 4, 2008).

[79] Thus, even if it promoted itself as ethical equity-based investing, if it was based upon Shariah, the disclosure issue would remain. Further, it is different than the so-called Catholic indexes. Even in the case of the “Catholic Values” funds, there is no representation that there is an underlying legal code requiring certain investment behavior by adherent Catholics. Instead, the funds follow “Catholic values” as they and their advisors determine them to be based upon the doctrine of the Catholic Church but they are just as clear that even if their “Catholic advisors” were to determine a company was not suited to these values, there is no requirement either by the rules of the fund or by the Catholic Church that such companies not be included in the fund. In other words, the Catholic funds are like other truly “values-based” funds where like-minded individuals agree on certain standards.

[80] Investment Company Act of 1940, Pub. L. No. 76-768, 54 Stat. 789.