Shariah’s Black Box

[111] It is not enough to refute this proposition by stating that the intent of Shariah is known: the avoidance of interest, speculation, and vice. If the refutation were both true and meaningful, it would suggest that the speaker knows what Shariah means by interest, speculation, and vice. And, if that were true, the speaker could devise his own legal structures without reference to or assistance from Shariah scholars and authorities. But this is not the case.

[112] A good example is to look at the published works of the legal practitioners making a living providing expert legal services to the SCF industry. The articles by McMillen cited herein generally are examples but notably see McMillen, supra note 88, at [page number] n.18 and accompanying text where the author waxes on about the utilization of Shariah in Saudi Arabia and various other Muslim countries and does not raise even a word of caution regarding the abuses well documented under the Shariah legal system.

[113] Id.; see also William L. Rutledge, Executive Vice President, [institution], Regulation and Supervision of Islamic Banking in the United States, Address Before the 2005 Arab Bankers Ass’n of N. Am. Conference on Islamic Fin.: Players, Products & Innovations in New York City (Apr. 19, 2005), available at https://www.nubank.com/islamic/regulation.pdf (last visited Jan. 28, 2008).  For a discussion of Shariah as “Medieval obscurantism,” see Alexiev, supra note 18.

[114] Even the scholarly literature produced by academic “Islamicists” and economists produces only rarely an objective critique that begins by asking whether Shariah is at all compatible with Western life.   See, e.g., Kuran, supra note 18.

[115] See McMillen, supra note 88.

[116] Borrowed term from Encyclopedia of Social Science Research 308-309 (Michael Lewis-Beck, Alan Bryman & Tim Futing Liao eds., 2003), available at https://www-personal.umd.umich.edu/~delittle/Encyclopedia%20entries/endogeneous%20variable.pdf (last visited Jan. 28, 2008). The endogenous/exogenous taxonomy for analyzing disclosure has an ancient pedigree. In standard common law fraud, commentators such as Judge Story distinguished between the heightened duty to disclose for intrinsic elements of a deal versus the extrinsic:

Intrinsic circumstances are properly those which belong to the nature, character, condition, title, safety, use, or enjoyment, &c., of the subject-matter of the contract, such as natural or artificial defects in the subject-matter. Extrinsic circumstances are properly those which are accidentally connected with it, or rather bear upon it at the time of the contract, and may enhance or diminish its value or price, or operate as a motive to make or decline the contract; such as facts respecting the occurrence of peace or war, the rise or fall of markets, the character of the neighborhood, the increase or diminution of duties, or the like circumstances.

1 Joseph Story, Commentaries on Equity Jurisprudence 300, at 301-02 (W. H. Lyon, Jr. ed., Little, Brown & Co. 14th ed. 1918) (1834).

[117] One such Shariah-based nominate lease contract is called Ijara. Vogel & Hayes, supra note 18, at 143-145.

[118] Typically, a sale-lease back financing transaction is a way for a company to gain liquidity and to move a capital asset off the balance sheet to avoid the burdens to the company’s debt ratios if standard capital asset financing is used. For a short discussion of the accounting aspects, see Richard J. Strotman, Sale/leaseback: Financing Tool for the ‘90s, CPA J. Online (Apr. 1991), available at https://www.nysscpa.org/cpajournal/old/10691657.htm (last visited Jan. 28, 2008). The motivation for a Shariah sale-lease back, however, is to avoid interest and to accommodate Shariah fixed rules relative to the actual transfer of ownership of the property, who is responsible for repairs (lessor), who can cancel the contract under changed circumstances (lessee), and how the parties will treat future sale and option terms. In other words, the purposes of a secular sale-lease back are purely for accounting purposes or “form”; for the Shariah contract, however, the purpose is to effect the actual form required by Shariah as “substance”.

[119] See Yaquby, supra note 38 (various Shariah authorities prohibit investment in companies that earn more than 5-15% of total earnings from interest income). The DJII achieves this prohibitory goal by screening out companies with a debt to market capitalization equal to or greater than 33%. For this and other ratios intended to screen for interest income, see M. H. Khatkhatay & Shariq Nisar, Investment in Stocks: A Critical Review of Dow Jones Shariah Screening Norms, Paper Presented at the Int’l Conference on Islamic Capital Markets (Aug. 27-29, 2007), available at https://www.djindexes.com/mdsidx/downloads/Islamic/articles/DowJonesShariahScreeningNorms.pdf (last visited Jan. 28, 2008).

[120] This is not to say that financial institutions will not in time become endogenous elements of Shariah if SCF were to be wholly institutionalized within the Western financial system. The point being that Shariah is not viewed as stagnant or inert vis-à-vis what is today understood as endogenous and all else being exogenous. In fact, the literature suggests Shariah is an organic system which, over time, has developed new endogenies and expelled others. See Schacht, supra note 51, at 199-211. What might be said is that the most static of the endogenous elements of Shariah are what are called the Five Pillars and Jihad, which is sometimes referred to as the Sixth Pillar. See Coughlin, supra note 24, at 83 et seq.